For wholesale investors in Australia

January 2022: A case for alternatives

Mathew Kaleel

Mathew Kaleel

Portfolio Manager


22 Feb 2022

Key takeaways:

Mat Kaleel, Diversified Alternatives Portfolio Manager, discusses the sell-off in stocks and bonds in January and how investors are turning to alternative strategies for returns that are uncorrelated to market beta.

Key takeaways

  • January 2022 saw equity and bond markets fall simultaneously, driving interest in other sources of returns.
  • While alternative strategies can be a source of returns uncorrelated to bond and equity market beta, January also highlighted some alternative strategies' exposure to these markets.
  • A deeper understanding of alternative strategies can help investors know what to expect through the cycle.

January proved to be a tumultuous start to 2022, after higher-than-expected inflation numbers set central banks on a path to normalisation, triggering a simultaneous re-pricing of equity and fixed income securities.

Since the onset of the COVID-19 pandemic, the past couple of years have been witness to three periods of simultaneous pullbacks in equity and fixed income markets. In the context of ultra-low interest rates, the capital destruction from periods like January are particularly meaningful events. With a new regime becoming apparent, some are looking to alternative investments for sources of returns that are uncorrelated to financial market beta.

For alternative investment strategies, January was a stress test which highlighted their direct and indirect exposure to stock and bond market beta. Pleasingly, in each of the three most recent simultaneous market sell-offs, our Global Multi-Strategy Fund has generated positive absolute returns for investors (the Fund's underlying strategy did so in March 2020, which is prior to the Fund’s inception).

Table 1: The three most recent simultaneous market sell-offs (in AUD)

Event Global Equities Global Fixed Income Australia Fixed Income Australian Equities Bitcoin Global Multi-Strategy Fund*
January 2022 -2.20% -1.66% -1.02% -6.45% -14.69% +2.56%
September 2021 -3.05% -0.97% -1.51% -1.89% -6.47% +1.12%
March 2020 -8.32% -2.24% -0.21% -20.83% -20.13% +1.18%*

Source: Bloomberg, Janus Henderson Investors. As at 31 January 2022. Global Equities: MSCI World ex-Australia Index (net dividends reinvested) in AUD. Global Fixed Income: Barclays Multiverse Index hedged in AUD. Australian Fixed Income: Bloomberg AusBond Composite 0+Yr Index. Australian Equities: S&P/ASX 300 Accumulation Index. Bitcoin: BTC/AUD. Fund performance is net of fees. *Composite Janus Henderson Global Multi-Strategy, net of fees (Australian unit trust was not launched at this time).

Alternative strategies can be complex, but knowledge of what is ‘under the hood’ can help investors understand how a strategy should perform through the cycle. Below we take a look at the inner workings of the Global Multi-Strategy Fund and how the underlying strategies contributed to returns in January 2022.

The Global Multi-Strategy Fund’s underlying strategies:

The Fund invests in a diversified set of bottom-up strategies, combined with a top-down ‘protection’ strategy. These are as follows:

Equity market neutral:

Seeks to deliver alpha by investing long and short across pan-European equities.

A stock’s valuation-range, which we determine based on its sector’s historical and future earnings prospects, highlights mispricing opportunities. Company valuations often lag share price movements as prices deviate from the stock’s range of fair value.

Implementation
When share prices move outside our valuation range, the strategy will seek to invest long, short or in pair trades to capture the stock’s potential return to fair value, while hedging out market and well-known factor exposure. Our access to these opportunities is supported by our alignment with broader firm research resources.

January 2022 attribution
Equity market neutral contributed 181bps, benefiting from the sharp rotation to value stocks. The value exposure is diversified across stocks and sectors, but biased towards financials, consumer, tobacco, energy and commodity names. These worked well in December, and have continued to do so in January, as investors have begun to price in a post-COVID opening-up of the economy.

Event driven:

Looks to exploit pricing inefficiencies around corporate events or capital structures.

The strategy aims to capture price dislocations around corporate activity (for example, merger arbitrage) and corporate structures.

Implementation
The strategy seeks to capture the available spreads by taking long positions in the under-priced shares versus a short positions in the more expensive shares.

January 2022 attribution
This strategy contributed 48bps.

Risk transfer:

Looks to capitalise on supply/demand-driven imbalances in the derivatives market.

This strategy seeks to provide liquidity to banks that are limited in how much risk they can hold on their balance sheets due to stricter banking regulations. Banks’ inability to hold the risk associated with structured notes has caused price distortions in the derivatives market, such as under-priced future dividends, cross-asset correlations and mispriced equity repurchase agreements (repos).

Implementation
The strategy typically trades listed derivatives to deliver a market neutral exposure to these mis-pricings.

January 2022 attribution
Risk transfer contributed 40bps.

Portfolio protection:

Seeks to mitigate tail risk through a multi-faceted protection strategy.

Implementation
This strategy aims to generate positive returns in periods of sustained market risk to which the rest of the portfolio is normally negatively exposed. It aims to generate uncorrelated positive returns in periods of sustained market stress and to enable the other strategies to weather shorter-term market stresses in order to remain exposed to longer-term return opportunities. It is used to manage tail risks at the total portfolio level.

January 2022 attribution
Portfolio protection contributed 40bps, with a very strong contribution from discretionary macro and positive returns from the trend following strategy.

Price pressure:

Aims to generate returns through the provision of capital to liquidity opportunities in government bonds and equities.

Fixed income price pressure:
This strategy aims to capture price differentials before and after a government bond auction. Government bond prices tend to drop pre-auction due to buyers delaying purchases, and dealers hedging anticipated allocations. Prices typically rise after auction due to missed bidders at the auction needing to buy, and reversion to pre-auction trend.

Implementation
The strategy seeks to arbitrage this short-term auction discount by buying and selling within the pre- and post-auction period.

Equity price pressure:
The strategy aims to capture price anomalies resulting from liquidity events where large lots of shares are offered on a primary or secondary basis. Shares are typically placed at their discounted price before the liquidity event and the discount usually disappears after the transaction.

Implementation
In these events, the strategy takes long positions intended to capture the price pressure discount while hedging the overall market risk.

January 2022 attribution
This strategy was flat (contributed 2bps).

Convertible arbitrage:

Aims to capitalise on mispricings of convertible bonds.

A fundamental, global, valuation-driven strategy seeking to profit from the discount/premium of convertible bonds relative to their underlying share price. It historically has exhibited low or negative correlation with long equity positions. Convertible bonds are often priced inefficiently, due to complexity, structural inefficiencies and investor constraints.

Implementation
This strategy seeks to capture price inefficiencies through long or short positions in convertibles, while maintaining market neutrality through hedging exposure to underlying equity, credit and interest rate risk.

January 2022 attribution
This strategy was flat (contributed 8bps).

With many central banks set to raise rates to combat inflation and normalise policy, we expect more market re-pricings ahead. Looking beyond traditional sources of returns can reduce a portfolio’s reliance on market performance and offset capital losses when equities and fixed income fall simultaneously.

Disclosure on attribution:
The Janus Henderson Global Multi-Strategy Fund is a feeder fund that invests in the Australian dollar denominated class of shares of the Janus Henderson Fund – Global Multi-Strategy Fund, a Luxembourg domiciled UCITS (“Underlying Fund”). The attribution displayed above is for the EUR share class of the Underlying Fund and may vary slightly from the attribution of the Fund due to currency effects. The AUD share class has the same investment objective, investment strategy and asset holdings as the EUR share class of the Underlying Fund. Attribution on gross EUR share class returns. Differences may be due to rounding.

Important information
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