Lyxor Asset Management offers a range of risk-balanced funds in its Absolute Return Multi Assets (ARMA) strategy: ARMA was launched in May 2010 and aims to deliver EONIA plus 2 per cent p.a. with a volatility target of 3 per cent; ARMA 8 is a more aggressive version targeting returns of EONIA plus 6 to 10 per cent with a volatility target of 8 per cent.
Florence Barjou (pictured) is Head of Multi Asset Investments and portfolio manager for the ARMA funds. Explaining the investment philosophy Barjou comments: “The aim is to generate absolute returns in a long-only framework using a top-down asset allocation investment process. We look to generate performance by dynamically navigating between asset classes.”
There are three key drivers to the fund’s performance. Firstly, strategic long-term asset allocation is built using Lyxor’s in-house risk budgeting methodology to balance risk across different asset classes; these are typically equities, bonds, commodity indices and satellite instruments such as emerging market bonds and high yield bond indices.
“Secondly, we use a tactical asset overlay. This includes a momentum-based CTA-type strategy based on price signals and a global macro-type strategy based on macroeconomic signals”, says Barjou.
The ARMA fund uses a rules-based process to build the portfolio and trades systematically. There is, however, a discretionary element to the global macro strategy with Barjou and the team inputting signals based on their market view. The input signals are then used by the model to size the portfolio accordingly.
“The third driver is volatility control which controls drawdowns and the fund’s risk profile,” explains Barjou.
Whilst the strategy is long-only the tactical overlay brings added flexibility by creating a long/short portfolio to support the fund’s long-term allocation. This is not active shorting, however, but more the ability to go significantly underweight within a specific asset class.
“Last year, for example, fixed income was a key driver of the fund’s performance. In May and June when the markets sold off, on the fixed income side the allocation to bonds was cut in ARMA 8 from nearly 135 per cent to less than 10 per cent,” says Barjou.
“In May 2013, the correlation between bonds and equities surged into positive territory so that, with the exception of cash, there was no safe haven anymore. If you did not realise that the source of risk was coming from fixed income and that this same risk was weighing on equities, then you would have made the wrong allocation and bought a safe haven asset that was no longer so. Instead of protecting the fund, fixed income would have added more risk to the portfolio,” says Barjou.
This is where ARMA comes into its own: through its ability to tactically shift from one asset class to another and control volatility by rapidly reducing exposure when markets turn.
Both the strategic risk budgeting and trend-following elements of the strategy delivered moderately positive returns in 2013 but as Barjou confirms, “the bulk of performance came from our tactical global macro strategy”.
On winning this year’s Hedgeweek award for Best Absolute Return Manager, Barjou says: “We are very pleased to be rewarded as Best Absolute Return Manager. The award comes as a recognition of the quality of our investment process and the robustness of the performance we generate.”
