Diversification in asset management strategy is a bit like insurance: a remarkably large number of people do not appear to think about it until they need it, which is all the more surprising, given that limited strategy funds – single-asset class, or single region, or macro only – have fared particularly poorly since the onset of the global financial crisis in 2007/08.
That was the point at which the role of the world’s central banks shifted from simply focusing on currency stability to being tasked with a multitude of goals, ranging from financial stability and lower unemployment through to rapid growth and, of course, low inflation, says Stephen King, global head of economics for HSBC, in London.
Whilst this wider policy mandate has been most notable in respect of the US Federal Reserve being told to maintain loose monetary conditions until and unless unemployment drops to around 6.5%, the Bank of Japan being given an inflation target of 2% rather than a 1% inflation goal, and the Bank of England being ordered by the UK government to consider the merits of forward guidance, the broader policy mandates now apply to central banks across the globe.
“The trading world is full of examples now where the currency of a country completely defies the trajectory that the macro picture would point to: Brazil, for example, has embarked on a rates raising blitz, but the real remains soft, and the fundamentals of the euro remain poor whilst the currency stays strong, to name but two,” says Marc Chandler, global head of currency strategy for Brown Brothers Harriman, New York.
The danger of pursuing a narrower, rather than broader, investment rationale – multi-asset, multi-regional, multi-strategy – appears to have been highlighted last week with the closure of QFS Asset Management’s currency-only trading fund, and the return of nearly $1 billion in assets to its clients, having lost 8.7% of its value in 2013 and 8.6% in 2012.
Underlining the perils of particularity in trading techniques was the fate of FX Concepts, once the world’s biggest currency hedge fund, which at its height – just before the financial crisis – had assets under management of around $14 billion.
By the time it declared its closure a couple or so months ago, it had about $661 million in assets remaining, which had to be sold off as part of bankruptcy proceedings that began in October.
QFS chairman and CEO Karlheinz Muhr, in New York, says: “The market environment does not offer adequate risk-adjusted opportunities for fundamentally driven quant macro strategies and that is unlikely to change for the foreseeable future.”
He adds that the firm’s difficulties reflect the “unconventional” monetary policies of global central banks that have “distorted” asset prices and made it harder for fundamentally driven currency funds to profit.
Not just currency, though, but any single or very limited strategy fund looks like its time has come and gone, as the most recent failure by QFS is the third fund closure for it in 12 months, with its global-macro hedge fund and its fixed-income hedge fund having also been closed down last winter, having lost 11.3% and 9.3%, respectively, in 2012.
Times have changed from 2011, when Muhr explained that the firm’s currency trading programme – which at that point was returning about 12.5% annually – reflected the basic idea that over time money flows from low-growth countries to high-growth countries, and that, consequently, QFS used deep economic fundamental analysis to determine which countries and markets it wanted to be in.
“The current market is not one of such simple cause and effect, as the type of global imbalances that underpinned this strategy are no longer clear-cut,” Robert Savage, CEO of the newly founded multi-asset multi-strategy quantitative hedge fund CCTrack Solutions, in New York, tells Euromoney.
“To take the apotheosis of this idea, look at the difference in current accounts between the US and China 10 years ago, and there was a huge difference, which prompted major investment money flows, but look at them now, and there’s virtually no difference.”
As is to be expected in the current investment environment, which remains dominated by the vagaries of quantitative easing, particularly in the US and Japan – and maybe shortly in the eurozone – it makes a lot more sense to diversify into a range of assets rather than just one, says James de Bunsen, fund manager at Henderson Global Investors, in London.
“The most popular of this multi-asset fund at the moment tends to have anywhere between a 20% to 60% equities component within a mixed asset mix, with a weighting skewed more towards the developed markets, especially at the long-end,” he adds.
Indeed, in the UK alone, multi-asset funds were the top-selling asset class for the vast majority of 2013 on Skandia’s Investment Solutions platform, with on average nearly 30% of sales each month flowing into multi-asset funds during the period, according to Alistair Campbell, head of investment marketing at Skandia, London.
A further complicating factor in pursuing a single, or very limited, strategy fund, says Savage, is that the market mechanisms for translating fundamental economic data, or indeed a single-asset strategy, into relevant market pricing has been obfuscated by the changing nature of how markets handle risk nowadays. This is a consequence in part of the swathe of new regulations, particularly regarding the collateralization of transactions.
In this context, says Chandler, since the global financial crisis, new rules on collateral and leverage by regulators in all key jurisdictions around the world have challenged the notion of the trading book in which banks are willing to put their own capital up for trading as market-makers in all market conditions. This leaves fewer risk-absorption mechanisms available to market participants and a higher level of sudden volatility.
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