Investment strategies for volatile markets

GLOBAL INVESTOR 3.07 Special — 35
The question is then: what kind of returns
are you looking for? And then what kind
of risks are you willing to take and feel
comfortable in taking? What is your time
horizon?
As explained earlier, in our traditional
mandates the emphasis is clearly on
allocation, while in total return we stress
structuring techniques. All our products
are driven off the same investment
strategy, but it is how this investment
strategy is applied when building a
portfolio where the difference comes in.
For example, we have been bearish
on bond markets since last year. Our relative
return portfolios have an interest
rate sensitivity that is 50% less sensitive
to adverse interest rate movements
than the bond market in general,
whereas in our total return strategies,
we might not have held bonds at all
during that period.
That kind of flexibility makes total return
sound like a global macro hedge fund
strategy, or fund of hedge funds. What
are the differences?
Daniel Hausammann: Our Total
Return Family solutions are regulated by
different legal bodies, such as the
Swiss Banking Association, and comply
with European fund regulations. So they
are more regulated than most hedge
funds. We can short equities, but only
using index derivatives, and our strategies
do not embed direct leverage.
Our investments are characterized by a
reasonable liquidity, high transparency
and regulation.
Arun Ratra: Hedge funds usually
promise a lot of alpha, or investment skill
above and independent of market returns.
But if you look at the correlation of
hedge fund strategies to the equity
market, then this has increased sharply
during the last four years. We, on
the other hand, are trying to achieve a
certain targeted return while limiting
the downside.
But total return is an evolution of
traditional investing versus a benchmark
such as MSCI European equities?
Daniel Hausammann: Certainly. It is
always difficult for an active manager
to explain to a client that the product has
succeeded by outperforming the benchmark,
while the overall performance has
still been negative. One of the reasons
we have a totally flexible asset allocation
is to provide a buffer against shortfall
risks. So we can be 100% invested in any
manager to explain to a client
that the product has succeeded by
outperforming the benchmark,
while the overall performance has
still been negative.” Daniel Hausammann
asset class or 0%. We can turn the
risk up or down, depending on market
conditions.
Arun Ratra: True in the sense that
clients have become much more cautious
after the equity market bubble burst in
the early part of the decade. They have
realized that equity investing does not
deliver only outstanding positive returns.
The value of diversification was felt when
equity markets headed south. This has
also led clients to become more cognizant
of their goals, namely the kind of return
that they want to achieve and the
risks they want to take. Total return,
using a true multi-asset class portfolio
approach, tries to deliver that targeted
return as we discussed earlier.
So total return will suffer some falls,
but not as much as traditional active or
passive investing?
Arun Ratra: Yes, but it will also not be
able to fully participate when markets
rise. If you target a certain return every
year, then you have to manage your risks
very well, which means that you cannot
take risk continuously and have to adhere
to risk budgets. Since there is no such
thing as a free lunch in investing, you
limit your returns on the upside. I want to
stress that we do not think of total return
as a panacea for all market conditions.
That does not exist. Total return should
be an additional consideration for investors
within our TPM framework.
Daniel Hausammann: We are not
promising there will never be losses with
total return, but it does aid wealth
preservation over the longer time horizon,
as a dynamic overlay within a client’s
portfolio. Whatever strategic allocations
to bonds, equities and alternatives have
been made, the extreme flexibility of
total return reduces any risks that market
conditions bring to bear on that under-