Chris Briant
Specialist implementation manager Parametric has launched a new strategy for Australian institutional investors after collaborating with Newport Beach, California-based Research Affiliates, seeking to produce better returns and lower volatility than traditional alternative investment approaches.
The new strategy is based on harnessing the power of three key investing factors – Value, Momentum and Carry – and is known as Systematic Alternative Risk Premia, or SARP. The genre is also sometimes referred to as Systematic Global Macro.
The SARP strategy covers equities, bonds, currency and commodities markets.
Parametric’s Australasian CEO, Chris Briant, says “We have close to a decade-long relationship with Research Affiliates, and started working with them on a better solution than a standard ‘black box’ hedge fund in 2016.”
“The Parametric SARP strategy combines powerful Research Affiliates research with Parametric’s distinctive implementation efficiency focus.”
“We know that super funds need to find alternative sources of returns which aren’t correlated to their main source of investment risk – equities. But funds also have tighter liquidity budgets than they used to and fee pressures. These things combined with a growing aversion to strategies that aren’t transparent make it the right time for us to launch SARP, which is a liquid, transparent alternatives solution that provides attractive, diversifying returns in a cost-effective manner” said Mr Briant.
“SARP reflects our ‘systematic alpha’ approach which uses a systems-based model that isolates trades from psychological biases, internal politics and other personal and organisational stresses that too often interfere with executing sound investing strategy.”
“These quantitative strategies using modern financial technology allow investors to profit from global macro opportunities with much greater transparency and lower costs than typical global macro hedge funds” he says.
Research Affiliates studied over three decades of data relating to the three factors of Value, Momentum and Carry.
Research Affiliates’ Global Head of Asset Allocation, Mike Aked, explains that, “the definitions of each factor and each asset class (Equities, Bonds, Currencies and Commodities) were chosen to maximise the future opportunities for the strategy.”
“Our experience of managing Smart Beta strategies for over a decade has reinforced the importance of robustness and implementation characteristics, rather than simply picking the best historical or back test performing factors. Putting the 12 individual strategies together in a single portfolio provides the potential for strong absolute returns at moderate levels of risk and leverage. The final approach, reflecting the collaboration with Parametric, includes features designed to avoid over-complication and reduce the impact of real-world portfolio costs like brokerage, foreign exchange commissions and taxes.”
“With low return prospects across most asset classes, diversifying return drivers become increasingly important. With SARP, our goal is to deliver strong uncorrelated returns in excess of cash within a relatively transparent and low-cost strategy,” says Mr Aked.
Mr Briant adds “Research Affiliates studies and our own research support us targeting outperformance over cash of 7-9% each year, net of fees and transaction costs, and the first year results of the actual strategy, net fees and costs, have certainly delivered on this, and then some. Our target Sharpe ratio of 0.8, net fees and costs, reflects the value of combining diversified strategies, many of which exhibit individual Sharpe ratios of less than half this combined target.”
In addition, the portfolio exhibits positive skew, rather than negative skew associated with crash risk.
“The advantage comes from both higher return and lower volatility – exactly what the ‘free lunch’ of diversification promises” says Mr Briant.
“Low yields, high valuations and anaemic global growth have pushed down expected returns. Given these conditions the likelihood of achieving anything close to a 5% real return is generally considered quite slim, hence the need for alternative solutions, such as SARP. Funds can get SARP in a pooled fund or we can customise a separate mandate to their specifications so that SARP exactly fits their needs. This couldn’t be more different to a ‘one size fits all’ hedge fund offering.”
Mr Briant notes: “We are very happy to be combining our best ideas with those of Research Affiliates to disrupt the traditional ‘black box’ hedge fund space. We believe that the new Parametric SARP strategy hits the sweet spot for super funds in terms of risk, return, liquidity, transparency and fees.”