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Alternative Market Briefing

Other Voices: Crisis risk offset; about time?

Monday, August 14, 2017

This article was authored by Russell Barlow, global head of hedge fund solutions at London-based Aberdeen Asset Management.

Like the ubiquitous force of gravity, when financial markets rise they must fall. The question is how hard you'll be hit on the way down.  There's plenty to suggest that a correction may be overdue whether the driver is concerns over Brexit, President Trump or the soaring levels of the S&P index.

Investors are unsurprisingly then looking for ways to protect themselves from market shocks and one of the strategies they're turning to is credit risk offset (SM) (CRO). They attracted $6.6 billion of investor inflows in 2016 according to HFRI, a hedge fund data provider. The strategies blend a range of asset classes and strategies expected to outperform when markets fall. Most try to capture some form of trending market behaviour (positive or negative) across different markets. Allocations tend to be in approximately 10% of the overall portfolio.

For instance, some CROs allocate to long duration US Treasury bonds as the "flight to quality" means that Treasuries appreciate significantly in the initial phases of a crisis. An allocation to trend following systematic global macro gives access to momentum-based strategies that are expected to perform well when a crisis is confirmed. Alternative risk premia systematically aim to capture the long-term returns of certain we......................

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