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

Azioni globali

Investire in società con una creazione di valore superiore e sostenibile.


Altro da leggere

Analisi 21.05.2024

Embracing regenerative agriculture for sustainable growth

UBP’s impact team believes in the pivotal role regenerative agriculture has to play in addressing environmental challenges and fostering long-term prosperity. This theme can provide fertile ground for investors looking at impact investing.

Analisi 08.05.2024

UBP House View - May 2024

In light of the extended duration of high interest rates, we’re employing a carry strategy, ramping up our allocation to high-yield bonds.

Analisi 26.04.2024

Swiss equities back on the radar

Following a relatively lacklustre performance in 2023 and the Swiss National Bank’s recent interest rate cut, is now the time to revisit the Swiss equity opportunity set? In this Investment Rendez-Vous podcast, Eleanor Taylor Jolidon, co-head of UBP’s Swiss and Global Equity team, walks us through Swiss business models, current valuations and industries of particular interest.