Alternative Risk Premia 2019 Performance Review

2019 was on average a much better year for alternative risk premia strategies relative to 2018, but it was not a year without dispersion amongst our peers. In this paper, we take a deeper dive into the drivers of performance of the Alternative Risk Premia – Representative Account (the Strategy) in 2019 and since inception, and how it compares to the competition.

Key takeaways from this paper:

• The Strategy delivered attractive risk-adjusted performance in 2019, outperforming the SG Multi Alternative Risk Premia Index.
• Trend following and most carry strategies performed well, as expected in a supportive macroeconomic and sentiment context.
• Dynamic allocation contributed strongly in 2019.
• Since inception, the Strategy has achieved positive asymmetry in different market conditions, with very low sensitivity to traditional asset classes.

2019 in Review

Despite slower global growth, unchanged earnings per share, and a rise in geopolitical uncertainties, 2019 saw the MSCI World Net Total Return index return 27.7% in USD. A key difference this year was a globally coordinated central bank shift to a more stimulative stance that served to push growth assets higher. Against this backdrop, the Strategy delivered 4.6% in 2019 (net of fees), outperforming the SG Multi Alternative Risk Premia index which returned 3.9% over the year (Figure 1). Similarly, Morgan Stanley shows that the average alternative risk premia fund returned 2.4% in 2019. In Kepler’s latest report, eight of the ten “Bottom 10 performing funds” in the “Multi-Strategy” category for 2019 were alternative risk premia funds, with returns ranging from ‑2.4% to -16.5%, highlighting the huge dispersion amongst key players in the market despite a positive year on average.

Figure 1: 2019 Performance vs. SG Multi Alternative Risk Premia Index

Our investment process consists of two main building blocks. The strategic book aims to harvest returns from a broad, diversified universe of alternative risk premia using a macro-risk based framework to provide consistent returns on average across economic regimes. The dynamic book adapts the strategic portfolio to the current macroeconomic, sentiment and valuation environment, in the form of active allocation across risk premia. In addition, the Strategy applies a risk control overlay to limit portfolio sensitivity to traditional assets.

This kind of portfolio construction provides full diversification: firstly across time horizons (long-term vs. medium-term); and further, across risk dimensions with a close monitoring of macro risks, market sentiment and valuation, the three main drivers of asset returns over the long term.

As can be seen below (Figure 2), each component contributed positively to performance in 2019.

Figure 2: 2019 Strategy Performance by Books

• The Strategy returned +5.3% (gross of fees, in USD) and +4.6% (net of fees) in 2019.

The dynamic book performed strongly over the year, contributing positively in nine out of the 12 months.

In August 2019, MSCI World Index lost almost 2%. Heightened market stress risk indicated by our proprietary market stress Nowcaster led us to overweight Trend Following, which had some very long bond positions at the time. This overweight position was beneficial as the risk premia was by far the strongest performer in the month of August. The dynamic book returned 0.5% in the month of August when the strategic book returned -0.11%.

Conversely, in September 2019, our Nowcasters suggested that we were going into a more benign market and macroeconomic environment. This led us to underweight the Trend Following strategy, and overweight the Equity Index Value and FX Carry strategies. The dynamic book contributed another 0.7% in the month of September.

Since inception, the dynamic book has continued to help the portfolio deliver smoother returns with a negative correlation to the strategic book. Indeed, as shown in Figure 3, while the dynamic book has delivered strong risk-adjusted performance since inception, the performance is even more positive when the strategic book is down versus when the strategic book is up.

Figure 3: Dynamic Book Performance Since Inception (13.12.2016)

• The Strategy has returned 3.7% (gross of fees, in USD) since inception, and 3.0% (net of fees).

At the risk premia level, the strongest performer was Cross-Asset Trend Following, contributing 4.8% to performance in 2019. This is followed by G10 FX Value which contributed 1.9%. Most alternative income strategies, including Bonds Carry, Credit Carry, G10 and Emerging Markets FX Carry, and Dividends Carry also contributed positively. Equity factors suffered to varying magnitudes over this period. For most of 2019, Equity Value continued its downtrend from 2018, but saw a very strong recovery in the last four months of the year. Indeed, the rotation from Equity Momentum to Equity Value over these four months has been quite impressive. Figure 4 shows the performance contributions from each alternative risk premia in 2019.

Figure 4: 2019 Strategy Performance Contributions by Risk Premia

Three-year Strategy Anniversary

December 2019 also marks the third anniversary of the Strategy. While a low volatility environment means that most alternative risk premia funds have not reached their target volatilities during this period, the Strategy has outperformed the average peer tracked by the SG Multi Alternative Risk Premia index on an absolute and risk-adjusted basis. Since inception Strategy and index performance results are shown in Figure 5 below.

Figure 5: Risk-adjusted Performance Since Inception (13.12.2016)

The Strategy aims to achieve its return objectives with limited sensitivity to traditional assets classes such as equities and bonds. As illustrated in Figure 6, since inception, the Strategy has achieved a lower sensitivity to global equities and bonds markets than the SG Multi Alternative Risk Premia index.

Figure 6: Beta to Global Equities and Global Bonds Since Inception

Further, as illustrated by Figures 7a and 7b, the Strategy has delivered upside-to-downside participation ratios that are greater than one on an absolute basis, and higher than those delivered by the SG Multi Alternative Risk Premia index.

Figure 7a: Performance in Rising and Falling Equity Markets Since Inception

Figure 7b: Performance in Rising and Falling Bond Markets Since Inception

As illustrated by Figure 8, during large equity market downturns since inception, the Strategy suffered limited losses relative to equity markets; and relative to the SG Multi Alternative Risk Premia index over most of these periods.

Figure 8: Strategy and Index Performance During Equity Downturns Since Inception

2020 Outlook

As of 2019 year-end, the Strategy is positioned with a growth tilt as our proprietary macroeconomic and sentiment Nowcasters suggest low risks of recession, inflation and market stress. Figure 9 illustrates our positioning as of 31 December. Credit, Dividends and Commodity Carry were not allocated due to negative carry.

Figure 9: Growth Tilts for Starting 2020 (capital allocation as of 31.12.2019)

We believe that central bank policy is likely to remain supportive in 2020, in light of muted inflation pressures that show no signs of increasing. However, the sustained rally has pushed valuations up to levels that we believe are concerning in some areas. In addition, investors will need to contend with an upcoming US election and an anticipated global slowdown. These factors will likely weigh heavily on investor sentiment. As such, we believe that now is a crucial time to highlight the benefits of a macro risk-based solution that aims to deliver smooth returns in different market conditions.

Important Information

Past performance is no guide to the future, the value of investments, and the income from them change frequently, may fall as well as rise, there is no guarantee that your initial investment will be returned. This document has been prepared for your information only and must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person without the prior written consent of Unigestion. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 

This is a promotional statement of our investment philosophy and services only in relation to the subject matter of this presentation. It constitutes neither investment advice nor recommendation. This document represents no offer, solicitation or suggestion of suitability to subscribe in either the investment vehicles to which it refers or to any securities or financial instruments described herein. Any such offer to sell or solicitation of an offer to purchase shall be made only by formal offering documents, which include, among others, a confidential offering memorandum, limited partnership agreement (if applicable), investment management agreement (if applicable), operating agreement (if applicable), and related subscription documents (if applicable). Such documentation contains additional information material to any decision to invest. Please contact your professional adviser/consultant before making an investment decision.

Where possible we aim to disclose the material risks pertinent to this document. The views expressed in this document do not purport to be a complete description of the securities, markets and developments referred to in it.  Reference to specific securities should not be considered a recommendation to buy or sell. Unigestion maintains the right to delete or modify information without prior notice.

Investors shall conduct their own analysis of the risks (including any legal, regulatory, tax or other consequences) associated with an investment and should seek independent professional advice. Some of the investment strategies or financial instruments described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment. These are not suitable for all types of investors. Unigestion has the ability in its sole discretion to change the strategies described herein.

To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks. Actual results could differ materially from those in the forward-looking statements. As such, forward looking statements should not be relied upon for future returns. Targeted returns reflect subjective determinations by Unigestion based on a variety of factors, including, among others, internal modeling, investment strategy, prior performance of similar products (if any), volatility measures, risk tolerance and market conditions.  Targeted returns are not intended to be actual performance and should not be relied upon as an indication of actual or future performance. 

No separate verification has been made as to the accuracy or completeness of the information herein.  Data and graphical information herein are for information only and may have been derived from third party sources. Unigestion takes reasonable steps to verify, but does not guarantee, the accuracy and completeness of information from third party sources. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. All information provided here is subject to change without notice. It should only be considered current as of the date of publication without regard to the date on which you may access the information. Rates of exchange may cause the value of investments to go up or down. An investment with Unigestion, like all investments, contains risks, including total loss for the investor.

Uni-Global – Alternative Risk Premia is a compartment of the Luxembourg Uni-Global SICAV Part I, UCITS compliant. The compartment is currently authorised for distribution in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Spain, UK, Sweden, Switzerland. In Italy, the compartment can be offered only to qualified investors within the meaning of art.100 D. Leg. 58/1998. The shares may not be offered or distributed in any country where such offer or distribution would be prohibited by law. All investors must obtain and carefully read the relevant prospectus which contains additional information needed to evaluate the potential investment and provides important disclosures regarding risks, fees and expenses. Unless otherwise stated performance is shown net of fees in USD and does not include the commission and fees charged at the time of subscribing for or redeeming shares

Additional Information for U.S. Investors

The performance figures are based on estimated fees and expenses as well as on the underlying strategy’s estimated performances given by fund managers, administrators, custodians and third party sources at a given date. Where performance is reflected gross of fees, potential investors should be aware that the inclusion of fees, costs and charges will reduce the overall value of performance. Unless otherwise stated, the performance data source are Unigestion, Bloomberg and Compustat.

This information is provided to you solely to give you background information relating to Unigestion, certain strategies it implements and currently offers. Before making an investment decision with respect to the strategy discussed herein, potential investors are advised to consult with their tax, legal, ERISA and financial advisors. Note that not all strategies may be available or suitable for investment by U.S. investors.

This document may contain forward-looking statements, including observations about markets and industry and regulatory trends as of the original date of this document. Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions. Forward-looking statements reflect Unigestion’s views as of such date with respect to possible future events. Actual results could differ materially from those in the forward-looking statements as a result of factors beyond a strategy’s or Unigestion’s control. Readers are cautioned not to place undue reliance on such statements. No party has an obligation to update any of the forward-looking statements in this document

Return targets or objectives, if any, are used for measurement or comparison purposes and only as a guideline for prospective investors to evaluate a particular investment program’s investment strategies and accompanying information. Performance may fluctuate, especially over short periods. Targeted returns should be evaluated over the time period indicated and not over shorter periods.

The past performance of Unigestion, its principals, shareholders, or employees is not indicative of future returns.

Except where otherwise specifically noted, the information contained herein, including performance data and assets under management, relates to the entire affiliated group of Unigestion entities over time including that of Unigestion UK. Such information is intended to provide the reader with background regarding the services, investment strategies and personnel of the Unigestion entities. No guarantee is made that all or any of the individuals involved in generating the performance on behalf the other Unigestion entities will be involved in managing any client account on behalf of Unigestion U.K. More specific information regarding Unigestion UK is set forth herein where indicated and is available on request.

There is no guarantee that Unigestion will be successful in achieving any investment objectives. An investment strategy contains risks, including the risk of complete loss.

The risk management practices and methods described herein are for illustrative purposes only and are subject to modification.

Unigestion

Alternative Risk Premia (USD)

December 2016 through 30 September 2019

Source: Unigestion

Special Disclosure: During March 2019, it was discovered that the 2018 composite gross return was stated incorrectly. It has since been corrected. For presentations prior to 31.03.2018 the strategy was measured against the LIBOR 3M USD + 7%. Beginning  April 2018 the firm determined that the benchmark did not accurately reflect the strategy mandate and the benchmark was removed.
Definition of the Firm: For the purposes of applying the GIPS Standards, the firm is defined as Unigestion. Unigestion stands for the Unigestion Group and includes all Unigestion subsidiaries (Unigestion Asset Management (France) SA, Unigestion SA,  Unigestion (UK) Ltd, Unigestion (US) Ltd, Unigestion Asset Management (Canada) Inc, Unigestion Asia Pte Ltd). Individual subsidiaries of the Unigestion Group do not claim GIPS compliance on a stand-alone basis. Unigestion is responsible for managing  assets on the behalf of institutional investors. Unigestion invests in several strategies for institutional clients: Equities, Hedge Funds, Private Assets and the solutions designed for the clients of our Cross Asset Solution department. The GIPS firm definition  excludes the Fixed Income Strategy Funds, which started in January 2001 and closed in April 2008, and the accounts managed for private clients. Unigestion defines the private clients as High Net Worth Families and Individual investors.

Policies: Unigestion policies for valuing portfolios, calculating performance,  and preparing compliant presentations are available  upon  request.

Composite Description: The Alternative Risk Premia composite consists of accounts which aim todeliver high risk-adjusted returns of cash +7% gross over 3 to 5 year investment horizon, while protecting capital during market downturns. The accounts  within the composite select the universe components presenting best positioning according to quantitative criteria including but not restricted to Macro directional, Yield capture, Carry, Trend following or Equity factors. In order to reduce exposure to general  trends in markets and to seek to maximize    the absolute return to risk ratio, the accounts essentially rely on systematic long-short strategies.

Benchmark: Because the composite s strategy is absolute return and investments are permitted in all asset classes, no benchmark can reflect this  strategy accurately.

Fees: Returns are presented gross of management  fees, administrative fees but net  of all trading  costs and withholding  taxes. The  maximum management fee  schedule is 1.5% per annum. Net returns are net of model fees and are derived by deducting the highest applicable fee rate in effect for the respective time period from the gross   returns each month.

List of Composites: A list of all composite descriptions is available upon  request.

Minimum Account Size: The minimum account size for this composite is 5’000’000.-   USD.

Valuation: Valuations are computed in US dollars (USD). Performance results are reported in US dollars  (USD).

Internal Dispersion & 3YR Standard Deviation: The  annual composite dispersion  presented is an asset-weighted standard deviation  calculated for the accounts in the composite the entire year. When internal dispersion is not presented it    is as a result of an insufficient number of portfolios in the composite for the entire year. When the 3 Year Standard Deviation is not presented it is as a result of an insufficient period of time.

Compliance Statement: Unigestion claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Unigestion has been independently verified for the  periods 1 January 2003 to 31 December 2016. The verification report(s) is/are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firms policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

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