1. Newsroom
  2. Liquid Alternatives to complement a Fixed Income Allocation
Menu
Analisi 17.05.2017

Liquid Alternatives to complement a Fixed Income Allocation

Liquid Alternatives to complement a Fixed Income Allocation

The end of 2016 represented a period of transition for global markets and it seems that we are currently in a new paradigm, particularly in the U.S.


Key points:

  • In light of policy shifts in the U.S. progressing and beginning to take shape in Europe, the transformation of investors’ fixed income exposures across alternative strategies has now become a reality.
  • Recognizing the need of investors for income, this paper highlights solutions that could help a portfolio position against a rise in interest rate volatility:
    - A liquid Discretionary Global Macro strategy capitalising on fundamental upward and downward trends in interest rates, credit and currencies;
    - A Senior Secured Loans solution acting as a pure positive carry strategy and bringing protection in a rising rate environment;
    - Insurance-Linked Securities solutions characterised by attractive yields and a true diversification power to all assets.
  • These solutions are to be considered as “diversifiers” within a global portfolio, finding uncorrelated return drivers in specific markets with a moderate risk budget.

A regime change in progress

The end of 2016 represented a period of transition for global markets and it seems that we are currently in a new paradigm, particularly in the U.S. This regime change is from a slow growth environment, dominated by low inflation and accommodative monetary policy, to one where we expect growth rates should be faster fuelled by fiscal easing, tighter monetary policy and a transition from deflationary to inflationary expectations. Outside the U.S., the ECB should begin tapering its quantitative easing (QE) program in a near future, and the Bank of Japan has already admitted the limits to QE by shifting to a yield curve targeting policy.

While the falling interest rate/rising bond prices have historically provided a ‘cushion’ for portfolios in the face of equity volatility, rising interest rate volatility is expected looking ahead. As a result, this ‘cushion’ or diversification effect may at best be less pronounced or potentially not be available in the months and years ahead. If this transpires, by default, volatility of portfolios would necessarily rise, exposing investors to higher levels of risk without compensating return prospect. Should bond yields continue to rise as they have done in recent months, the harmful impact of this new environment on portfolios may be more apparent.

In light of this development, most investors have already been exploring options to begin the process of transforming their traditional fixed income exposure in order to be better positioned to respond to this new regime change.

Liquid alternatives defined as ‘diversifiers’ definitely belong to the proposed options. Either by taking advantage of their investment flexibility or by simply capitalising on a relatively nichy market or sector, these ‘diversifiers’ have the potential to find uncorrelated return drivers in specific uncrowded markets. Targeting a moderate risk budget and exhibiting a reasonable liquidity profile, they act as risk reducers within a global portfolio by lowering volatility, drawdowns and correlation to traditional assets.

In this paper, we propose three liquid alternative investment solutions, which are particularly well suited to complement a traditional non-risky allocation under the current market conditions. They are:

  • a Discretionary Global Macro solution
  • an European Senior Secured Loans solution
  • an Insurance-Linked Securities (ILS) solution

Their rationale and competitive edge are detailed hereunder.

Global Macro strategy

Access to a liquid Global Macro manager capitalising on fundamental trends in interest rates, credit and currencies worldwide

Our 1st liquid alternative solution is a pure Discretionary Global Macro strategy, which can trade both sides of the market (long and short) mainly in rates, currencies and credit. Hence it can combine risk-on and risk-off books across those asset classes, scouring the world for growth and transformation themes on one hand (risk-on), or simply using shorts and portfolio hedges on the other hand (risk off). The portfolio only trades highly liquid instruments.

The strategy has three main competitive edges: (i) a strong fundamental research where the street views are not taken as granted; (ii) a portfolio approach that relies on the ability to efficiently expand the investment opportunity set to specific markets and regions (e.g. emerging markets); and (iii) a medium size allowing a certain level of investment flexibility and an accountable expression of trades compared to larger macro funds which appear to be over capitalized today.

What to expect from our Global Macro strategy in a rising rate environment

Because of its investment flexibility to go long and short markets, the Global Macro strategy is agnostic about where we stand in the rate cycle. For instance, the portfolio’s current rates exposure has a balance between developed markets where rising yields are expected and a few select emerging markets with the potential for significant rate cuts. The potential to express views on plenty of countries that are disconnected with the U.S., European or Japanese interest rate cycles can add many dimensions in terms of portfolio construction. And historical P&L has shown that performance could be generated from both rising and declining rate opportunities.

Read more (.PDF)

Marion Olivier 150 x 150.jpg

Olivier Marion
Senior Investment Specialist - Alternatives

 

Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Le news più lette

Analisi 01.10.2020

COVID-19: UBP vi terrà aggiornati

Dalla comparsa del coronavirus, UBP accompagna e sostiene i suoi clienti nel contesto inedito di questa crisi sanitaria mondiale. La Banca vi aggiorna regolarmente sull’adeguamento dei suoi piani alle regole precauzionali fissate dalle autorità e condivide con voi le più aggiornate analisi dei suoi esperti sulle conseguenze della pandemia per l’economia mondiale e i mercati finanziari.

Analisi 30.06.2020

Aggiornamento delle prospettive di investimento per il 2020

L’economia globale al bivio

Analisi 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.


Altro da leggere

Analisi 26.11.2020

European Small Caps – Rising Stars

Smaller companies as an exciting source of growth opportunities

Analisi 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

Analisi 21.11.2020

UBP Investment Outlook 2021

Il mondo nuovo