“Long/short credit doesn’t make any sense to me. Unless you use a lot of leverage, you can’t make money,” he says. Jaap Bouma, senior portfolio manager at Optimix, a wealth manager, agrees: “These funds should be short funds instead. They will struggle to make money if they have a long book too.”
Instead, Bouma mainly uses market-neutral equity and volatility arbitrage strategies in his absolute return bucket. “We have allocated 4% of the total portfolio to equity market-neutral, and 9% to volatility and convertible arbitrage. These are both alternatives for fixed income,” he says.
Optimix had long resisted venturing into the absolute return space, reluctant as it was to cede control over part of its asset allocation, but the lack of yield across the fixed income spectrum has forced the company to do so. Fixed income portfolios would have to be fully allocated to non-investment grade and emerging market debt to attain the return target of 5% p.a. that the company has set for its absolute return investments.
Optimix eventually moved into absolute return funds about a year ago, and results have been mixed so far. “Our equity market-neutral fund has really disappointed because of the lack of volatility. It is down 5.5% year-to-date, but the convertible and volatility arbitrage funds we own have done quite well,” says Bouma. The Privium Done fund, a Dutch hedge fund that invests in convertible arbitrage strategies, is up 4.3% year-to-date. The Mint Tower fund, another Dutch hedge fund that invests in volatility arbitrage strategies, is up 3.6%. Besides “They are not correlated to the MSCI World, like most so-called absolute return strategies.”
Absolutely not
The disappointing performance of absolute return funds has only reinforced the view of Jan-Willem Tjoonk, head of investments at wealth manager and investment platform NNEK, that liquid alternatives just aren’t worth it. “We are not at all interested in those products. I just don’t see how they can generate a return juggling around several low-yielding products considering the fees they charge are quite high,” he says.
Considering the downsides connected to absolute return, it’s obvious that wealth managers need to look beyond it to create future-proof portfolios however. Giving control of asset allocation away makes wealth managers feel uneasy. And so does the ‘black-box’ nature of some absolute return funds. More sacrifices are therefore necessary.
The final part of this series will discuss the final trade-off fixed income investors are having to make: accepting illiquidity in exchange for a little more yield. To follow soon…
