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Chapter 3 – Investment strategy perspectives

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All investors are keen to hear where the next market opportunity lies or why a particular investment strategy is well suited to the prevailing economic wind, and this was no exception at the Amsterdam Investor Forum. During his opening address, Gildas Le Treut (pictured) asked the audience to vote on the following question: What alternative investment strategies do you see best performing in 2016?

The results were as follows:

• CTA ~ 32 per cent (even though this was the least performing strategy in 2015, returning -0.49 per cent);
• Multi-Strategy ~ 17 per cent (+4.14 per cent returns in 2015);
• Macro ~ 14 per cent (+2.38 per cent returns in 2015). 

Clearly, CTAs are expected to provide protection to investors' portfolios this year and bring a diversifier effect, but knowing which CTAs to select, given that they employ a variety of styles (short-term trend following, long-term trend following, counter-trend etc.) is not always easy. 

The obvious starting place in any selection methodology is performance. One CTA that did well last year was ISAM, whose fund, ISAM Systematic Trend, returned 15 per cent. The strategy uses adaptive trend-trading models to capture alpha from market divergence. "We make a diverse set of investment decisions across different systems, strategies, algorithms and we manage them. Markets throw things at us that we have to risk manage; how you deal with the difficult scenarios is key," said Alexander Lowe, Managing Partner, speaking on a CTA panel moderated by Alan Dunne of Abbey Capital.

CTAs are often thought about as thriving in periods of volatility, which typically favours short-term strategies. Richard Mathieson, Managing Director, Scientific Active Equity, BlackRock, said that he expects to see a structural shift in higher volatility during 2016. When it comes to idea generation, he said that "everything we do is based on some kind of economic hypothesis; coming up with new theories to answer the same questions in different ways. What's alpha today is beta tomorrow," confirming that Scientific Active Equity uses machine learning strategies that can be effective in terms of understanding different parts of a trade. 

"The ideas that were good in the late 80s are still good, for the most part, today. However, a slight change in the volatility regime can completely change the effectiveness of ideas. We don't data mine research to create ideas, we come up with ideas/theories from scratch and try to tap in to human behaviour with the models that we build," said Paul Buethe, Senior Portfolio Manager, Crabel Capital Management.

Education needed

Whilst CTAs appear to be coming back onto investors' radar screens, there is still a lot of education required. Part of the issue, according to Lowe, is that some investors view trend following as an easy strategy to implement and do not necessarily see the value of them. Of course, the opposite is true. CTAs have to build strategies that combine the right number of markets and asset classes and ensure that the right technical indicators are embedded in the model to identify longs and shorts, and react to volatility. 

Most investors are well educated but the biggest issue is explaining that CTAs do suffer large drawdowns periodically. "We expect investors to understand that they might have to deal with a 20 per cent drawdown, because if a CTA has had a great couple of years' returns I can guarantee there's a landmine just up ahead," said Lowe. Mathieson said that when drawdowns happen it pays to take down risk quickly "so our portfolio managers follow drawdown guidelines closely".

Certainly, there are signs that more investors are returning to CTAs. Nicolas Gaussel, CIO, Lyxor Asset Management said that CTAs were a preferred strategy for 2016, along with macro strategies; both of which can be thought as risk mitigating strategies to alleviate the impact of allocation mistakes. CalSTRS, for example, plans to increase their allocation to these risk mitigating strategies from USD1 billion to USD10 billion over the next three years. 

Market opportunities in equities

With respect to equity long/short strategies, Marc-Antoine Chatin, Partner, Parus Finance, is finding more short selling opportunities in the market than longs. Speaking on the panel, "Is life too short to be long?" moderated by Nicolas Campiche, CEO, Pictet Alternative Advisors, Chatin said that one aspect of Parus Finance's short strategy is based on the oversupply of mining and commodities driven by China. Another key driver of its short strategy is the limit of future quantitative easing.

"We stayed above 80 per cent net long between 2009 and 2013, holding very few shorts. But then we started to see that valuations of our longs were getting challenged. Our long book today is 30 per cent and our shorts have increased from 0 to 50 per cent. The short book accounted for 90 per cent of our returns last year. Currently, our net short exposure is -8 per cent, so we make money when markets lose money," explained Chatin. He said that currently Parus Finance's largest short positions are in energy and mining stocks.

Speaking on the "100 Women in Hedge Funds" panel at the Amsterdam Investor Forum, Rani Piputri, Senior Portfolio Manager, Saemor Capital, a Dutch quantitative investment manager, said that there were stock picking opportunities in European equities. "We see stock dispersion in Europe. It is a fertile source of alpha both on the long and short side for us. However, you have to keep a level head and stick to your strategy in periods of market volatility," said Piputri. 

Fellow panelist Anne-Sophie D'Andlau, Co-Founder and Managing Partner, CIAM, a Paris-based event-driven fund, said that CIAM had been able to identify better entry points amidst the recent market volatility, particularly for its special situations investment book. "Our strategy is holding up well amid higher volatility. Medium-sized spreads are widening which is benefiting our merger arbitrage book. We are able to take advantage of the inefficiencies in the markets right now," said D'Andlau. 

Amanda Pullinger, CEO of 100 Women in Hedge Funds, moderated the above panel. 100 Women in Hedge Funds was founded in 2001 and has become an important driving force in the industry, counting more than 13,000 members globally. Education, professional leverage and philanthropy are the three key pillars of the organisation. "We put on around 100 industry events globally in 20 locations. I'm pleased to chair this particular panel as it is our first ever in Amsterdam," said Pullinger.

European telecoms

On the long side, opportunities exist in growth companies that are innovating their business models and bringing disruptive technology to the marketplace. Identifying the next Apple, Facebook or Tesla – companies which are having a major disruptive effect on the world and are difficult to stop once they start growing – is no easy task but the technology sector, at large, could yield good sources of returns over the next five years; especially if one considers the fact that billions of advertising dollars are set to move from TV into the online domain.

Daniel Avigad is Portfolio Manager, Lansdowne Partners, where he runs a long-only equities book. Commenting on market sectors in which he had the highest level of conviction, Avigad made reference to European telecom companies, which have USD1tn of debt both on and off balance sheet and are too big to fail.

"However, the regulatory environment has been designed to make them fail in many ways. My contention is that 180 telecom companies in Europe could potentially have shrunk to five major names in the next five years, comparable to the five main telecom operators in the US. Deutsche Telekom is already a large stakeholder in British Telecom (via BT's GBP12.5 billion acquisition of EE) and we could see Orange and Telecom Italia merge, for example," said Avigad.

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