‘Crisis alpha’ becoming more valuable than ever

There is little doubt that advisers and asset allocators around the world have been rapidly researching which investments have performed best in periods of elevated inflation. Among the most common responses are traditional “macro” hedge funds and “trend-following,” or managed futures strategies.

The latter seemingly performed well during both the dotcom crash and the global financial crisis, however, an extended period of low volatility and single-direction markets (that being up) appear to have made returns from these high-frequency, non-correlated strategies more difficult to achieve.

One such detractor has been the laser-like focus on keeping volatility extremely low, which unfortunately in a period when equity and bond markets were booming, effectively capped short-term returns. Renowned for its fixed-income capabilities, PIMCO has leveraged its massive investment capabilities and data analytics to launch its own strategy in Australia, titled the TRENDS Managed Futures Strategy.

Recent returns have clearly been volatile, but were strongly positive over what was an eventful 2021. The strategy seeks “to provide positive returns when investors need them most,” with a focus on capturing momentum across equities, fixed income, currencies and commodities. Deemed “crisis alpha,” the strategy aims to provide diversification during market selloffs and appears to have done so, holding up reasonably well in January 2022.

With an investment objective being to generate a return of cash plus 5 to 6 per cent, it is well above previous iterations of the strategy and even above many popular long-short equity funds. Volatility, but more importantly, trends, are central to the investment thesis and the strategy, with December seeing three of the four key strategy pillars delivering positive returns; with fixed income the only detractor.

The very-short-term focus of the strategy, which looks at trends within the last two months rather than longer periods, means the underlying futures exposures are able to more quickly respond to markets than the longer-term trend-following strategies, as does the ability to ‘scale-up’ and ‘scale-down’ exposures depending on the strength of the trend and associated indicators. The portfolio managers are quick to reiterate their focus on outright diversification benefits, rather than solely improving their Sharpe ratio

The universe of options expands to about 100 individual indices on which futures can be traded, with a particular focus on avoiding the “diversification pursuit” that has reduced the diversification benefits of similar strategies that have come before. Recent highlights include long positions in energy commodities and European equities, and shorts in global interest rates and precious metals.

Staff Writer