PIMCO: Best Relative Value Fund Manager
The PIMCO Multi-Asset Volatility Fund treats volatility as an asset class and targets net annualised returns of 10 to 15 per cent with equivalent volatility, independent of broad measures of market return. Positions span interest rates, equities, commodities and currencies, and reflect structural, opportunistic and tail-risk hedging dimensions.
Josh Thimons, Josh Davis and Matt Dorsten, the fund’s portfolio management team, are supported by PIMCO’s extensive firm-wide resources across trade operations, portfolio management/analytics and product management.
PIMCO combines its deep understanding of volatility markets with a robust macroeconomic investment process. The portfolio is designed so that no single theme dominates. Within structural strategies each asset class has a 15 to 25 per cent expected source of added value and risk contribution, while for alpha strategies it is 25 to 50 per cent.
Product manager Min Xiao (pictured) says: “Structural positions exploit the tendency for levels of price volatility implied by options markets to exceed the values that are actually realised. Structural anomalies persist because end-users of the options markets are like insurance buyers who willingly pay a volatility premium. Each structural sleeve may have its own hedging requirements and together, the structural strategies are sized with particular risk targets and diversification effects in mind.
“Discretionary positions express relative value views, both within and across the asset classes, in conditional form. Often influenced by macro considerations, these conditional positions are designed to produce asymmetric payoffs with limited downside risk. These positions, two or three per asset class on average, add an element of risk diversification and are rigorously governed with stop-loss and targeted gain limits.”
Min also stresses the importance of tail-risk hedging in overall portfolio construction. “The tail-risk strategy primarily consists of long volatility positions across multiple markets to hedge against extreme market crises.” she says. “Returns in the active tail risk strategy are generally expected to be negative in benign markets but may produce strong positive returns when the volatility of certain asset classes spikes. Furthermore, the fund is committed to spending at least 300 basis points per year on tail-risk hedging.”
Since the fund’s launch in July 2011 equity and bond markets have risen and fallen, producing periods of high and low volatility, but the MAV fund has generated positive returns every month, albeit over a short time period. Says Min: “Up to the end of December, the fund returned 20.1 per cent net of fees with annualised volatility of 9.3 per cent. Structural positions contributed 70 per cent of the returns, discretionary positions 15 per cent and tail-risk hedging strategies 15 per cent.”
Min believes the fund’s low correlation with traditional asset classes makes it a good diversifier for investor portfolios. Certainly its market-neutral structure and active tail-risk overlay equip it to add value across asset classes in a variety of market environments.
“The competitive landscape is limited for relative value volatility strategies,” says Min. “Proprietary trading desks are closing and the hedge fund community too has a much smaller asset base than pre-crisis. While dislocations in the markets have become more frequent and extreme, the competition in chasing those dislocations has diminished materially.”
She adds: “We are delighted by the Hedgeweek award and committed to focusing on volatility as an asset class – delivering high absolute returns with limited volatility from PIMCO’s best ideas across global asset classes.”
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