Market-Independent Absolute Return

Client-Specific Concerns

This investor sought market-independent strategies which exhibit very limited equity / credit beta (structurally and empirically)—ideally less than 0.1 in normal and stressed equity markets. As well as market independence, the client preferred strategies with defensive characteristics, offering flat or positive performance in down-markets. Other requirements included: minimum fund AuM of USD 100m; minimum firm AuM of USD 250m; minimum live track record of one year (ideally longer); a preference for weekly-or-better liquidity in a pooled fund.

Outcome

• Strategy-agnostic: With a focus on outcomes rather than specific hedge fund styles, a very large manager universe was initially reviewed for this mandate. The 39 offers accepted spanned 12 different strategy types, and the 3 finalists all represent different strategies.
• Customised performance analysis: Rather than use cluster analysis, the team focused on equity sensitivity and returns consistency. Equity sensitivity was judged by looking at performance in isolated stressed equity months and at average performance in months where the MSCI World delivered <0%, <-2%, <-5%. These figures were used to generate Protection Ratio calculations (the ratio between the average return of the strategy in months where the benchmark return was negative and the performance of the benchmark in those months). Consistency of outperformance was looked at on a 2-year rolling 1-month basis, as well as static look-back windows of 3, 5 and 7 years.
• Bias towards downside protection. In the latter stages of assessment, the scoring framework was adapted to suit the client’s needs, giving a stronger bias towards performance resilience in down-market.