Abrdn launches “black swan” strategy

UK-based global investment firm abrdn is looking to expand its footprint by launching its Global Risk Strategy fund to Australian investors.

The company, formerly known as Standard Life Aberdeen, has changed its name to Abrdn as it moves to refocus the business following the sale of the Standard Life brand to Phoenix Group earlier in the year.

Global head of alternative investments, Russell Barlow, will be leading the alternatives team of 27 dedicated investment professionals, all contributing to the new fund’s strategy.

The Global Risk Mitigation Fund (GRM) will provide investors with a alternatives strategy that aims to deliver strong positive returns when developed market equites experience material declines and volatility is higher than normal.

In other words, during a sea of red, when equities have fallen off a cliff, this fund offers a diversification buffer against bad times.

Barlow says the fund “combines diversified hedging strategies into one active solution and is ‘convex’: as developed equity markets fall, its rate of gain increases. GRM benefits from increased market volatility; it performs at its best when investors need it most.”

The fund is three-times leveraged, providing greater protection with a lower portfolio allocation. This allows investors to retain assets with high return potential while managing downside risk cost-efficiently. It also allows investors to gain a larger hedge with a small upfront investment.

Abrdn has positioned the fund as a tool advisers can use to protect client portfolios from the downside risk of developed-market equity volatility. It allows advisers to reduce portfolio drawdowns from clients when things go bad, and also compound returns. At the same time, daily liquidity is available, so that advisers can monetise gains quickly and reallocate capital as required.

What assets is the fund invested in?

The team uses derivatives primarily swaps, exchange-traded derivatives and other over-the-counter derivatives to meet its investment objective.

“The underlying strategies themselves employ advanced derivative strategies to gain investment exposure,” abrdn says. “These underlying strategies have exposure to instruments with embedded leverage including futures, options, swaps, forwards and other derivatives.

“In addition, the underlying strategies, include a number of relative-value strategies that can generate positive returns without taking on directional market risk. These relative-value strategies offset the cost of owning hedging (or protection) strategies and in doing so enhance the returns of the fund.”

The risks?

The fund will be dealing exclusively with derivatives, which puts the fund in the high-risk category, despite it being a ‘risk mitigation’-styled fund. The fund doesn’t go into great detail on its investment strategies but says it labels its strategies as “First Risk”, “Defensive Factors”, “Systematic Trend Following”, and “Tail Risk”. 

• ‘First Risk’ Strategies – Strategies that have strong negative correlation to equities and perform strongly in the initial phase of a crisis.
• ‘Tail Risk’ Strategies – Long global equity market volatility, and volatility relative-value strategies, benefiting from sustained increases in volatility.
• Systematic Trend Following Strategies – Strategies that seek to capture trending market behaviour (positive or negative) across multiple asset classes and markets.
• Defensive Factors Strategies – Strategies of carefully selected factors that exhibit a low and stable correlation to equities through different volatility regimes.

This fund definitely isn’t for the faint-hearted. It’s a tail risk protection fund, similar to an insurance policy during a bull market. The benefits will only become visible when the next “black swan” event comes around. That’s when GRM kicks into gear and returns increase exponentially, as equities tumble. It is positioned to perform best when your clients need it most. Consider it your insurance, to keep your clients from leaving when the going gets tough.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.