Alternatives

Kickin’ It with Risk

Kickin' It with Risk
clock
2 min 19 sec

As MAD magazine’s Alfred E. Neuman proclaims, “What, Me Worry?” In the third quarter, global markets fully embraced that fearless mantra. And why not? Discarding past worries of stubbornly slow economic growth and other trifling distractions, markets focused on positive catalysts suggesting rising prices ahead.

Corporate earnings worldwide enjoyed a notable uptick. Shrinking ranks of unemployed in major economies like the U.S. and the euro zone lifted consumer confidence, even if real wage growth was still elusive. Hopes further rallied around pending tax reform in the U.S. Meanwhile, China’s well-curated markets did not stray far from a message of support for the country’s 19th National Congress, which took place in October, just after the quarter ended. Volatility as a measure of perceived risk reached cyclical lows across the major markets. Amid this synchronicity of global progress, investors seemed unfazed by the twists and turns surrounding North Korea, the turmoil at the White House, and the destructive hurricanes that battered the South.

The S&P 500 Index’s 4.5% jump was impressive, but edgier markets leapt higher. The Russell 2000 Index surged 5.7%. The MSCI Emerging Markets Index soared 7.9% while the MSCI World ex USA gained 5.6%. Investors were more enamored with Technology and other higher beta plays than value-based sectors, as the Russell 1000 Growth (+5.9%) outpaced the Russell 1000 Value (+3.1%). Bond markets held steady, more or less, with the Federal Reserve confirming a measured balance sheet reduction plan. Oil traded modestly higher on tighter projected supply, while the euro gained 3.7% against the dollar. Reflecting geopolitical uncertainties and a marginally weaker dollar, gold added 3.4%.

Amid this risk-on environment, hedge funds got some traction. Illustrating raw hedge fund performance without implementation costs, the asset-weighted Credit Suisse Hedge Fund Index (CS HFI) rose 1.8% in the third quarter. As a proxy for live hedge fund portfolios, the median manager in the Callan Hedge Fund-of-Funds Database advanced 2.0%, net of all fees and expenses.

Within CS HFI, the best-performing strategy was Emerging Markets (+5.6%), in which embedded market beta explained some but not all of the gains. Other strategies performing particularly well were Equity Market Neutral (+4.4%) and Long/Short Equity (+3.0%), both of which benefited from an improved stock-picking environment. Although the pace of merger deals slowed recently, Risk Arb (+1.7%) continued to generate attractive risk-adjusted returns. Given relatively little bankruptcy activity, Distressed (+1.6%) achieved modest gains. Managed Futures (+1.3%) and Global Macro (+1.8%) benefited slightly from top-down trends and discretionary calls, particularly in the equity markets.

Within Callan’s Hedge Fund-of-Funds Database, market exposures meaningfully affected performance in the third quarter. Supported by the equity rally, the median Callan Long/Short Equity FOF (+3.1%) handily beat the Callan Absolute Return FOF (+1.8%). With exposures to both non-directional and directional styles, the Core Diversified FOF advanced 1.9%.

Callan Hedged Fund-of-Funds Style Groups Quarterly Returns (as of Sept. 30, 2017)

Since the financial crisis, liquid alternatives to hedge funds have become popular among investors for their attractive risk-adjusted returns that are similarly uncorrelated with traditional stock and bond investments but offered at a lower cost. Much of that interest is focused on rules-based, long-short strategies that isolate known risk premia such as value, momentum, and carry found across the various capital markets. These alternative risk premia are often embedded, to varying degrees, in hedge funds as well as other actively managed investment products.

Measuring the performance of these alternative risk premia in the third quarter, the Credit Suisse Neuberger Multi-Asset Risk Premia Index gained 0.8% based upon a 5% volatility target. Within the underlying styles of the Index’s derivative-based risk premia, the biggest winner was Equity Momentum (+6.9%), followed by Currency Value (+3.7%) and Currency Momentum (+3.2%). The leading detractor was Equity Value (-2.8%).

Within Callan’s database of liquid alternative solutions, the median managers of Callan Multi-Asset Class (MAC) style groups generated positive returns, gross of fees, consistent with their underlying risk exposures. For example, the median Callan Risk Premia MAC rose 3.0% based on its exposures to uncorrelated style premia (such as those in the CS Neuberger Index noted above) targeting 5% to 15% portfolio volatility. Typically targeting equal risk-weighted allocations to major asset classes with leverage, the Callan Risk Parity MAC gained 3.5%. Its traditional unlevered benchmark of 60% S&P 500 and 40% Bloomberg Barclays U.S. Aggregate Bond Index trailed with its 3.0% return. Given a usually long equity bias within its dynamic asset allocation mandate, the Callan Long-Biased MAC (+3.2%) marginally outperformed the 60%/40% index. As the most conservative MAC style focused on non-directional strategies of long and short asset class exposures, the Callan Absolute Return MAC edged ahead 1.4%.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Private Markets

Managers See Declines but Outpace Benchmarks

Joe McGuane
Joe McGuane analyzes hedge fund performance in 3Q22.
Private Markets

Tough Environment Leads to Losses for Hedge Fund Managers

Joe McGuane
Joe McGuane analyzes hedge fund and MAC performance in 2Q22.
Private Markets

Alignment of Interests: Best Practices to Make Sure Investors and Their Managers Are in Sync

Jan Mende
Jan Mende discusses how institutional investors can make sure their interests are aligned with their private markets investment managers.
Private Markets

Investing in Data Centers: The Real Assets of the Digital Age

Lauren Sertich
Lauren Sertich provides a summary of her recent paper on investing in data centers.
Private Markets

Hedge Fund Strategies: A Guide for Institutional Investors

Joe McGuane
Joe McGuane describes the key attributes of hedge funds and how institutional investors should evaluate them.
Private Markets

Market Volatility Tests Hedge Fund Managers

Joe McGuane
Joe McGuane analyzes hedge fund and MAC performance in 1Q22 amid the volatile market environment.
Private Markets

After the Many Challenges in 2021, What’s in Store for Hedge Funds in 2022?

Joe McGuane
Joe McGuane provides an outlook for hedge fund strategies for the rest of 2022.
Macro Trends

Hedge Funds and Ukraine: A Guide for Institutional Investors

Joe McGuane
Joe McGuane analyzes hedge fund performance in 2022 and how managers are handling the volatility stemming from the invasion of Ukraine.
Operations

A High-Level Summary of the Callan 2022-2031 Capital Markets Assumptions

Capital Markets Research
This blog post details the process and reasoning behind the Callan Capital Markets Assumptions for 2022-2031, and provides detailed information about ...
Private Markets

Hedge Funds End Year on a Positive Note

Joe McGuane
Joe McGuane explains what happened with hedge funds and multi-asset class strategies (MACs) in 4Q21 and the impact of the pandemic.

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.