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Jan Viebig, CEO and Head of Alternative Investments at Harcourt Investment Consulting

Shift towards investing in liquid alternatives

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Liquid alternatives are one of the fastest growing areas of the asset management industry. In Europe, assets grew from EUR36bn to EUR236bn between 2008 and 2014, according to a Deutsche Bank report released last September (entitled From Alternatives to Mainstream Part Two). 

By definition, liquid alternatives are dynamic trading strategies that combine the sophisticated, goal-driven strategies of the hedge fund universe with the daily liquidity, transparency and regulatory oversight of mutual funds. 

At Harcourt, the alternative investments boutique of Vontobel Asset Management, the Research-Driven Strategies (RDS) team, headed up by Dr Jan Viebig (pictured), Head of Alternative Investments, has developed a series of liquid alternative funds. These vehicles are designed to give investors exposure to strategy-specific risk premiums as opposed to traditional risk premiums (e.g. equity risk).

The three Pure Strategy funds are:

• Vontobel Fund – Pure Momentum Strategy 

• Vontobel Fund – Pure Dividend Strategy 

• Vontobel Fund – Pure Premium Strategy. 

“Right now, a lot of people shy away from hedge funds because they are too expensive, they aren’t liquid enough or transparent enough. In the US and Europe, these circumstances have resulted in the growth of liquid alternatives as institutional investors no longer find traditional asset classes attractive. Moreover, investors are worried about a rise in volatility which could lead to the erosion of wealth,” explains Viebig. 

The RDS team analysed over 20 different strategy-specific risk premiums. The three strategies highlighted above were found to yield the most attractive and robust returns in benign market regimes as well as during periods of market stress. 

As Viebig notes: “The strategy you follow determines the risk you take on. That is probably the most important point to make about liquid alternatives. They are only a solution for liquid hedge fund strategies that fit well into the UCITS framework.”

According to back-testing results, if an investor had held an equal one third allocation across all three Pure Strategy funds between 2003 and 2013, they would have enjoyed a 7.20 percent annualised return (net of fees) with a 4.35 percent volatility. 

So how would investors use such a liquid alternative fund to complement their existing hedge fund allocations? 

“We combine time-series momentum with cross-sectional momentum. The former tries to exploit trends in markets using a quantitative approach, creating a series of signals to determine whether the strategy should go long or short. That is not always effective in short-term choppy markets and requires an additional source of momentum returns. Cross-sectional momentum involves looking at a cross-section or universe of stocks, e.g. the S&P 500, to hone in on stocks that show positive (or negative) momentum.

“By combining these two strategies, over longer periods of time it is possible to create stable returns, even during choppy market conditions,” explains Viebig. 

Overall, investors are becoming more interested in liquid alternatives. 

“For a typical long/short equity fund, they might be paying upwards of 4 percent in fees whereas a liquid alternatives fund will only charge about 1 percent in management fees and a 10 percent performance fee. That’s a huge saving,” notes Viebig.

“We feel there is a huge secular shift taking place whereby investors are shifting a significant amount of money from traditional asset classes, which are no longer cheap, to dynamic trading strategies that we call liquid alternatives.” 

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