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Since Brummer & Partners' decision to establish their first hedge fund in 1996 onshore in Sweden, the Nordics have been a centre of excellence in both active management and professional investing. The Swedish FSA has the reputation to actually know and understand hedge funds, and has provided an environment where retail investors, for instance, have been able to access hedge fund returns at a really early stage.
UCITS absolute return funds have grown nine times faster than offshore funds since 2009
This success story is continued with UCITS absolute return funds which have grown by around 47% since 2009, while the offshore fund market has grown by 5%. That is a fundamental change in the industry. Regulations have put more structure around hedge funds, so they are not as scary as they used to be perceived in the past, and regulators feel it is acceptable for someone in a private pension or individual portfolio to access that kind of diversification.
Alternative asset managers have a great opportunity to show the advantage of alternative investments in today’s environment, where rates can’t really go much lower and equity valuations may not be very attractive. Also more traditional institutions are adopting the alternative investment route. We see, for example, that an institutional investor such as the Church of England, which by the way runs a portfolio of £9 billion, has no issue with investing significantly in CTAs.
Crisis Alpha and Innovation in the CTA Space: Will they bounce back in the next quarter?
CTAs say that one of the most important benefits they provide to investors is “crisis alpha”. These funds should give their strongest returns in times of market distress, and especially equity distress which is typically when irrationality dominates. Equity distress signals change in the macro-economic, political or psychological climate and is strongly linked to trending markets. That is when CTAs or momentum-based strategies have historically performed the best, and there are good reasons why they will continue to do that the next time the market tanks.
In light of the bad years (2011, 2012, 2013), most CTAs have put a lot of research effort into risk management and portfolio composition. They were forced to, because things suddenly were not as easy as in previous years. But these steps, or shifts in quality or ability, happen regularly. As soon as the CTA industry is pronounced dead, which happened a year and a half ago, something happens in terms of development. Possibly the most major development now is the CTA’s improved ability to control downside risk.
The interplay between convergent and divergent trading styles seems to be very cyclical. Currently, the markets have reached a new low in terms of lack of divergence and lack of trends. RPM’s proprietary aggregate measure of general trendiness or momentum across major futures markets is at a record low, they have not seen such a low reading and such subdued price moves since the 90s. Values like these have historically signalled good CTA returns over the next quarter or so.
Have banking regulations gone too far? Unintended consequences of regulations created new major market risks:
Here is something that is starting to trouble regulators globally. Some of the larger banks no longer offer OTC clearing to their clients, but will only do it for their books. In essence, all investment banks seem to follow the same strategy nowadays, which is to just pursue the top 20 or the top 40 most profitable clients, and are happy with that. Major investment banks are saying now that they neither can nor want to offer clearing services to for example smaller clients, and in some cases even larger clients, like pension plans or insurance companies, as their business are unattractive from a capital adjusted perspective. Unless the client can offer interesting ancillary business, the return is just too small. This is a problem for the general real money industry and for the hedge fund industry, but the banks don’t necessarily care.
Consequently the problem goes back to the regulators. The banks are going to say, “We are now so constrained by the regulatory requirements that we have limited balance sheet to offer and can’t take any more business.” These themes are actually picking up now, and the regulators have started to worry about these items such as clearing, market liquidity and the potential impact for retail clients.
The 2015 Opalesque Nordic Roundtable took place end of October at RPM’s Stockholm office with:
- Mikael Stenbom, RPM
- Erik Eidolf, Nordkinn
- Thomas Stridsman, Alfakraft
- David Rindegren, Carnegie Asset Management
- Mikael Spangberg, Nektar
- Stefan Nydahl, IPM
- Renaud Huck, Eurex
The group also discussed:
- What can systematic managers learn from Google, Netflix, Amazon, Facebook, and others?
- How the “not-invented-here” syndrome within the quant shops hurts performance and investors
- How are machine-learning and data science shaping the quant space? Will a systematic trading shop be “dead” in ten years if they don’t adopt those technologies?
- How to overcapitalise a hedge fund startup to ensure sustainability
- What is the “game plan and tagging” that has been developed at the Central Bank of Norway?
- How to create an investment process that is NOT very sensitive to changes in the general market environment
- How can funds survive the ever more often occurring black swan events?
- What is more important for systematic strategies: risk management or entry/exit strategies?
- What alternative investment managers can learn from behavioural finance.
- More and more assets are being concentrated to fewer and fewer players. What is really behind this investor behaviour?
- Are investors’ investment decisions driven by rationality in the first place, or something else?
- What are the appropriate criteria for investors and trustees to make responsible investment decisions?
- New products from Eurex: Mini-DAX® futures, spot FX trading
- How and why Eurex invests in start-up firms focusing on FinTech
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