So far, so uncorrelated
Since launch the fund has nearly kept up with global equities, but has delivered a correlation of almost exactly 0%
Tom May, Chief Executive & Chief Investment Officer
The Fund launched in May 2022, so by the end of 2023 it will be just over a year and a half old.
Before we launched, some (potential) investors questioned whether we were creating a rod for our own back by naming the fund the “Uncorrelated Strategies Fund”. We imagine these questions were based on the, well, questionable performance of some of the funds in the Absolute Return sector, many of which performed poorly in 2022, proving how difficult it can be to build something truly diversified from equities and bonds.
We thought about it, but remained comfortable with the name for two reasons. Firstly, none of the five investment themes found in the Fund derive their returns, either positive or negative, from the direction of either equities or bonds, and have demonstrated over time to provide low correlation to both asset classes. Secondly, the five themes are themselves not highly correlated with each other. So, there are two levels of “uncorrelatedness”.
What has this led to in terms of performance and correlation so far? Well, From May 2022 to December 2022, the Fund rose just under 2% compared with a fall in global equities* of more than 6%. In 2023, the Fund has risen just over 8% to the end of December compared with a rise in global equities of 18%. So, since launch, the Fund has nearly kept up with global equities, but has delivered a correlation of almost exactly 0%. The chart below tracks the Fund’s performance since launch against that of global equities* and global bonds**, and one can observe the different paths they have taken, which is a good graphical representation of the lack of correlation of the Fund with traditional assets.
Past performance does not predict future performance. Source: Atlantic House, Solactive US Treasury 7-10 Index, Solactive GBS Developed Markets Large & Mid Cap Index, 03-05-22 - 03-12-23.
The five themes
Let us now discuss how the five themes included in the Fund have contributed to the Fund’s performance in 2023. Of the five themes, we believe four have structural “tailwinds” and one has potential “headwinds”. We define a tailwind as a phenomenon that we believe we will persist over the long term, and a tailwind strategy will harness one of these phenomenon.
Tail
Strategies within this sleeve aim to make high returns in the event of large market shocks, but preserve capital when markets are calm. This is the one “headwind” theme. It is akin to buying insurance, which has a cost, so could lost money over time. However, these strategies are an important part of the Fund as they can provide significant protection in the event of market falls, a key parameter for the Fund. The strategies target both equity and interest rates. This year has been one when interest rates have moved wildly. Consequently, this part of the Fund has performed well, adding approximately 2.3% to the Fund’s performance – the insurance pay out has been higher than the cost.
Trend
Trend following strategies take advantage of the tailwind that markets tend to trend more often than they mean revert. That has not been the case this year. We saw a large reversal in interest rates in March this year which hurt trend following strategies badly, and overall the whipsawing nature of markets this year, particularly in rates, has meant this has not been the year for trend following, whereas last year it really was. The performance of strategies harnessing this theme have subtracted approximately 3.6% from the Fund’s performance.
Dispersion
This theme takes advantage of the tailwind that expectations of single stock volatility tend to be less elevated relative to what actually transpires compared to the expected levels of index volatility. This year, with their being quite large dispersion between various different market sectors, strategies within the this theme have fared well, adding approximately 0.75% to the Fund’s value.
Volatility Carry
This theme takes advantage of the tailwind that expectations of future volatility are usually higher than what transpires. Over time this is one of the most powerful tailwinds there is, but one must handle with care! Scaling is very important across the whole fund, but in particular within this theme. As the market became spooked during the SVB and Credit Suisse events in March, volatility levels became elevated, causing strategies within this theme to cost the Fund. However, as expectations of higher volatility did not transpire over the rest of the year, March’s losses were recouped quickly, and then more so, meaning that this sleeve has been the most profitable this year so far, adding 3.2% to the Fund’s performance.
Non-Directional Carry
This theme takes advantage of the tailwind that commodity, interest rate and currency forward curves tend to be steeper at the front end of the curve than at the back. It has been a good year for strategies within this theme, with them approximately 1.75% to the Fund’s performance.
The End Result
The strategies within the five themes explained above have added almost 4% to the Fund’s performance over the year. Adding this to the contribution of the interest earnt on the collateral base within the Fund has led to the 8% performance so far this year.
Obviously, we are pleased with the performance both this year and since launch, but the most pleasing aspects for us are twofold. Firstly, the correlation to traditional assets has been very low as we planned and hoped for. Secondly, the scaling between the sleeves is key, and we are pleased that every sleeve has exhibited a volatility within the Fund that we planned for, which has enabled us to keep the weightings to each theme constant rather than being stopped out of any strategies.
*Global equities represented by the Solactive GBS Developed Markets Large & Mid Cap Index
**Global bonds represented by Solactive US Treasury 7-10 Index
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