Low volatility absolute return solutions
#Market Strategy — 16.03.2021

Low Volatility Absolute Return Solutions

Edmund Shing, Global Chief Investment Officer

Vaccines, recovery and reflation

Low volatility absolute return solutions

Medium-Term, Low Risk

  • Investors continue to grapple with the challenge of finding low-risk solutions with positive returns. Alternative UCITs funds often carry a risk in line with bond funds and generally have a low correlation with global market trends. We see opportunities in these funds to generate positive returns, even after adjusted for inflation..

Alternative UCITs funds offer opportunities

Long/Short Equity:

The current context of disruptive innovation and structural changes, amplified by the Covid-19 crisis (working from home, e-commerce, dematerialisation, deglobalisation) will result in polarised winners and losers.

A long/short equity manager can profit from going “long” (buying) winners and “short” (selling) losers.  By combining “longs” and “shorts”, the manager also builds a portfolio which has limited net sensitivity to a general fall in equity markets. 

In 2021, an agile manager will be playing the expected cyclical rebound, and will limit exposure or even go short on richly-valued sectors that benefited from last year’s crisis.A new opportunity: the commodity-rolling yield

Relative Value:

Managers focus on mispricing assets, anomalies in spreads (yield differences) as well as a mean-reversion of prices. Just like their equity counterparts, “long”/”short” credit managers will be able to benefit from the post-crisis outcome of clear survivors and losers.

Convertible bond arbitrage is also in a sweet spot, with record issuance post crisis and high single-stock volatility, offering attractive bond versus equity arbitrage opportunities.

Event Driven:

These strategies take hedged positions on M&A targets to benefit from the difference between the market and offer prices.

Structural and Covid-related disruption provides many takeover and merger opportunities. Capital market activity, such as IPOs (Initial Public Offerings) including SPACs (Special Purpose Acquisition Companies), secondary issues, etc. also offers profit opportunities to such managers.

Less liquid event-driven strategies also look for opportunities in distressed debt.

Low risk, still some reward

  • Rates remain at very low levels historically, even after the recent spike. Almost half of the bond universe in the eurozone bears negative yields. Absolute return bond funds can be a solution for defensive investors looking for positive yield at a low risk level.
  • vStructured products usually offer a capital protection and are therefore suitable for defensive investors in uncertain market environments.

Absolute return bond funds

Absolute return funds use a flexible strategy investing mainly in short-maturity fixed-income products or actively managing the duration (sensitivity to interest rate movements).

While the funds focus on capital preservation in all market conditions, their objectives are also to increase the value of the funds via capital gains and the generation of income.

Fund managers may enhance the performance by using derivatives to gain exposure to the volatility of other asset classes, such as equities.

Structured products

Structured products typically involve the use of sophisticated instruments (futures, options and credit default swaps) to which individual investors usually have limited access. These instruments serve to optimise returns or limit losses while reducing sensitivity to a rise in interest rates or a fall in share prices.

Structured products usually offer a partial –or even full– capital protection at maturity.

The underlying assets may include oil, precious metals, equity indices or interest rates.

We recommend investing in short-dated defensive products (typically between 1 and 5 years).

2021 Investment Themes

Our 10 Investment Themes for 2021

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