“Huge amounts of money have been flowing into multi-asset and risk-parity funds,” said Fred Ingham, head of international hedge fund investments for Neuberger Berman, who was one of the speakers at Expert Investor Europe’s first ever event in Monaco. “Kind of all that money is predicated on similar volatility assumptions about correlations within and across asset classes. If you see step changes in these correlations, that will lead to massive shifts in proposed asset allocation of these models, and that’s quite a big systemic risk,” he concluded.
In the first three months of this year alone, €19.8bn was poured into absolute return funds by European investors. About half of that money went into the category best known for using risk-parity strategies: multi-strategy funds. The Monegasque fund selector community is buying into this trend: three quarters of local fund buyers plan to increase their allocation (see chart). This stands in sharp contrast to the popularity of absolute return fixed income: only a third specifically allocate to this asset class.
Volatility troubles
A sharp increase in market volatility could be an important trigger of such a change in correlations. Ironically, many investors have opted for risk-parity funds to mitigate the volatility risks of their portfolios. And extreme volatility is something we will see re-appear on the market sooner rather than later, all the speakers in Monaco believe.
“The rise of ETFs means investor money is less sticky now. This is going to exacerbate the liquidity issues that we already have, in terms of big flows in and out of asset classes in a short space of time on the back of short-term investment opportunities,” said Andrew Lake, the manager of the Mirabaud Global Strategic Bond Fund.
However, not all investors are approaching this issue from the same angle. Barry Norris, a long/short European equity manager at Argonaut, is someone who prefers to look at the bright side of things. “Volatility is often a bad thing for businesses, but good thing for investors,” he said. “It makes life a lot more interesting in terms of opportunities. For example, the rise of the dollar has created significant opportunities and how that reflects in corporate earnings.
