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Alternative Market Briefing

A Swiss managed futures strategy that can offer diversification to any portfolio

Tuesday, November 08, 2022

amb
Sandro Francioni
B. G., Opalesque Geneva for New Managers:

TARO (R) Diversified is a Swiss algorithmic and systematic investment strategy that offers diversification benefits to almost any professionally managed portfolio through its non-correlation virtues.

The strategy is managed by FALGOM AG, an asset manager founded in 2019 that specialises in algorithmic investments.

TARO aims to exploit market inefficiencies through short-term momentum and countertrend tactics. It uses unique techniques developed by FALGOM which are applied to futures in different asset classes - currently 20 liquid futures from four asset classes.

The algorithm itself is identical for each financial instrument, and the same logic is used to enter into both long and short positions. This makes TARO - in combination with its countertrend approach - a genuinely unbiased investment strategy with a return profile that differs from CTAs, the manager says. From inception in February 2022 to the end of October, it returned 9.3%.

"Although TARO is a directional managed futures strategy, it generates a unique return profile which does not correlate with most CTA strategies," founder and CEO Alessandro Francioni tells Opalesque. "This is achieved by TARO Diversified's opportunistic short-term approach which takes positions against the predominating trend and therefore contrasts the trend-following approach of most CTA strategies. With an expected return of above 15%, volatility of around 10%, and a drawdown of 10%, TARO Diversified provides a superior risk-return profile. Thanks to the uncorrelated return profile TARO Diversified offers significant diversification benefits to almost any professionally managed portfolio, no matter if the portfolio is a classic 60/40 structure or a hedge fund portfolio."

The strategy is based on two decades of quantitative research and market experience, he adds, and it is fully systematic. So that leaves no room for discretionary decisions. "We have designed the strategy with the built-in ability to automatically adapt to changing market environments, both short-term changes of volatility regimes and longer-term structural changes in market behaviour."

The strategy further applies crisis alpha to outperform in periods of high market volatility.

"During crises, markets usually show an increased volatility which provides more profitable trading opportunities for the TARO strategy," Francioni explains. "This is caused by the fact that market participants tend to change their positioning more often in volatile markets which generates the inefficiencies the TARO strategy is designed to exploit. During periods of increased stress in the markets, our risk management framework automatically adjusts position sizes and therefore plays a crucial role in managing the downside."

Furthermore, he adds, the strategy is completely unbiased towards rising or falling markets by design, which is very useful for generating alpha returns.

Crisis alpha is a relatively new term used to describe investment strategies designed to generate positive returns during equity market panics (see In search of crisis alpha.)

The strategy's simulated net returns from January 2015 to September 2022 were 15.8% annualised (with a volatility of 10.4%), compared to 5.2% for the SPI (Swiss performance index) and -0.9% for the SBI (Swiss bond index).

It is distributed through an AMC (Actively Managed Certificate) with monthly liquidity, aimed at qualified institutional investors in Switzerland, and it has CHF7.7m (US$7.73m) in AuM.


The SG CTA Index is up 27% YTD up to the end of October, and the Credit Suisse Managed Futures Hedge Fund index up 23% YTD to the end of September.

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