Aquila Capital’s Harold Heuschmidt (pictured) says the Risk Parity funds of which he is head manager use a multi-asset investment strategy that allocates risk across different asset classes offering a risk premium, namely equities, bonds, commodities and interest rates, with the contribution of each asset class risk-weighted to balance risk proportionately across the portfolio.
GFM: What is the history and background of your company, principals and funds?
HH: Founded in 2001 by Roman Rosslenbroich and Dieter Rentsch, who both have extensive experience in international asset management, Aquila Capital is a leading independent investment manager with a focus on alternative investments.
The firm specialises in the structuring and management of market-independent investment strategies that are driven by global macro trends, target above-average, long-term returns and are uncorrelated with traditional asset classes. Aquila Capital has more than 80 employees and currently manages EUR4.1bn in assets from six offices in Europe and Asia.
First established in 2004 in an offshore structure, Aquila Capital’s risk parity strategy was launched in a Ucits format in 2008, since when it has become one of the largest absolute return Ucits.
The strategy, which has consistently delivered positive year-on-year returns, today encompasses three Luxembourg-domiciled Ucits funds targeting 7 per cent, 12 per cent and most recently 17 per cent.
GFM: Who are your main service providers?
HH: The funds’ main service providers are PricewaterhouseCoopers as auditor, Alceda Fund Management as management company, and HSBC Trinkaus & Burkhardt (International) as custodian and central administration agent.
GFM: What is your distribution strategy and targeted client base?
HH: The funds are available to both retail and institutional investors and are registered for public distribution in Germany, Austria, Switzerland, Spain, Italy, the Benelux countries and the UK.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
HH: Aquila Capital is weathering the global financial crisis extremely well, having continued to see stable inflows across our product range. Our absolute return funds, which include the AC Risk Parity Funds, have also done extremely well, delivering consistently positive year-on-year returns since launch and achieving attractive performance so far this year.
GFM: What are the advantages and disadvantages of offering hedge fund strategies within a Ucits structure?
HH: In my view, absolute return funds structured within a Ucits vehicle provide investors with a number of significant advantages. They offer enhanced transparency, liquidity and regulated oversight, all of which have increasingly become important criteria for investors when making their investment choices.
At Aquila Capital, we recognised this shift in investor needs very early and so introduced the Ucits version of the risk parity strategy. Launched in 2008, the AC Risk Parity 7 and Risk Parity 12 funds were among the very first absolute return open-ended Ucits III funds to become available in the market. They offer daily pricing and liquidity and have consistently performed well.
GFM: Please describe your investment process.
HH: The Risk Parity funds utilise a proven multi-asset investment strategy, allocating risk across different asset classes that offer a risk premium, namely equities, bonds, commodities and interest rates. To ensure that the portfolio is efficiently diversified, the contribution of each asset class is risk-weighted to balance the risk proportionately across the fund.
Allocations therefore are steered by the expected volatility of the asset classes rather than by their expected return. As a result, the risk contribution of more volatile asset classes, such as equities and commodities, is reduced while the risk contribution of less risky asset classes, such as fixed income, is increased. The key feature of this risk-weighted combination of liquid and uncorrelated asset classes is that it significantly improves the Sharpe ratio.
GFM: How do you generate ideas for your funds?
HH: Within Aquila Capital’s quant research team, we have built up significant capabilities that allow us to generate new ideas both to enhance existing strategies and to develop new systematic strategies. Once identified, the new ideas are further developed and tested in-house.
GFM: What is your approach to managing risk?
HH: As you would expect, risk management forms an integral part of the Risk Parity funds’ investment process. The funds utilise the FundCreator risk management system, based on research conducted by Drs. Harry M. Kat and Helder Palaro at London’s Cass Business School, which is unique in its capability to tightly control a large variety of risk parameters. The funds apply FundCreator on a daily basis to track key risk parameters closely and optimise the portfolio exposure, ensuring a stable and predictable risk profile over time.
GFM: How has your fund performed?
HH: The performance of our Risk Parity funds has been convincing. Since launch, the Risk Parity 7 and Risk Parity 12 Funds have generating annualised returns of 4.48 per cent and 9.17 per cent per annum respectively. The Risk Parity 17 Fund was launched this month.
The funds’ carefully constructed long-only portfolio provides return stability. They have demonstrated that they are able to generate positive performance even in times of significant market downturns, making the Risk Parity funds an ideal diversifier for an investment portfolio.
At the height of the financial crisis in 2008, the Risk Parity 12 strategy achieved an annual return of 11.35 per cent, compared to a loss of 42.40 per cent for the Euro Stoxx 50 equity index and of 19.79 per cent for the HFRI absolute return fund index. So far this year the Risk Parity 7 Fund has returned 4.21 per cent, and the Risk Parity 12 Fund 8.09 per cent.
GFM: What do investors currently expect from managers?
HH: In this turbulent, uncertain market environment, investors seek investment products that provide uncorrelated returns and are able to generate positive, stable returns in a range of market environments, something that our Risk Parity funds have demonstrated.
GFM: What differentiates you from other managers in your sector?
HH: While the risk parity concept of asset allocation is increasingly gaining investors’ attention, it is a highly specialised space and just a small number of experienced managers offer access to the strategy. A key feature that sets us apart from our peers is our track record, which spans back to 2004.
We were the first manager to offer investors access to the strategy in a liquid, regulated Ucits format. The unique investment opportunity has not gone unnoticed by investors. The funds have seen significant inflows since their launch as Ucits in 2008, and we now have assets of more than EUR1.9bn in the strategy.
Furthermore, we can offer investors the choice of three Risk Parity funds, targeting volatility levels of 7 per cent, 12 per cent and 17 per cent respectively, to cater to a broad range of risk-return appetites.
GFM: How do you view the environment for fundraising over the coming 12 months?
HH: We have seen significant investor interest in our Risk Parity fund range, and are confident this interest will continue. In my view, investment concepts that offer uncorrelated, stable returns will continue to prosper in the current market environment.
I firmly believe that robust and liquid investments that can achieve consistent absolute returns without capacity problems will increasingly gain the interest of institutional and retail investors alike. Adding such products to traditional investment portfolios offers the opportunity to increase the average return of the portfolio and Sharpe ratio significantly, while reducing the volatility.