155. Hedgework: AHL Target Risk Programme
The AHL TargetRisk Programme (‘Programme’) applies Man AHL‘s (‘AHL’) 30 years of alternatives experience to long only investing across multiple asset classes. This experience is best illustrated in the risk management techniques employed in the Programme. The full range of market conditions experienced year-to-date has been a great opportunity to showcase these techniques, as we illustrate in this short note. Below we highlight three key risks faced by investors, and how the Programme has responded to these risks, as illustrated in Figure 1.
- Dr. Graham Robertson
- Man AHL
Figure 1: Top panel: Performance of key equity and bond markets
Middle panel: Volatility of these key markets, and momentum risk overlay employed in the Programme
Lower panel: Gross exposure across asset classes traded
The periods selected are exceptional and the results do not reflect typical performance. Exposure data is shown for information purposes only and is subject to change without notice.
1 As of March 2018; Source: Man Group database, Bloomberg
Risk 1: Increasing volatility
Volatility rises in certain areas, or across the entire portfolio, increasing the risk of large losses. AHL’s approach is to cut exposure as volatility rises, as clearly shown in the first week of February. This adaptive response is designed to generate stable return streams.
Risk 2: Prolonged market weakness
Why have full exposure to a market when momentum is weak? AHL’s approach is to reduce risk in markets by up to 50% if AHL’s momentum signals indicate strongly negative trends. Figure 1 illustrates that weakness in bond markets throughout January and February (top panel) leads to a decrease in allocations to bonds (middle panel) and a corresponding cut in exposure (bottom panel). In this particular case, risk allocations to fixed income are reduced to 75% of their normal levels this year to February 22nd. In contrast, since equity markets were robust throughout January (top panel), 100% risk allocation was maintained (middle panel) until around February 8th when momentum in equities turned negative.
Risk 3: Bond driven sell-offs
Stresses in bond markets can potentially spill over to other asset classes and natural hedging properties could break down. AHL’s approach is to monitor yields and intraday correlation levels between equities and bonds, and reduce portfolio risk by up to 50% should contagion risks rise significantly. This occurred on the 9th of January, as illustrated by the arrow in the lower panel, and risk was cut across asset classes. This contagion risk diminished on February 12th and the portfolio was re-geared.
These techniques have been developed over several decades by AHL’s 100+ research team1, in collaboration with the Oxford-Man Institute of Quantitative Finance. The result is active position management, facilitated by AHL’s state-of-the-art execution platform. In every case, our objective is to maximise risk-adjusted returns for our investors: maximising the return from market risk premia in supportive conditions, and reducing downside risk in more challenging markets. The track record of the Programme is illustrated below.
Figure 2: AHL TargetRisk Programme2
Performance since inception against Morningstar USD Moderate Allocation index, 11.12.2014 – 31.03.2018
2 The performance is based off live trading. Please note that the performance data is not intended to represent actual past or simulated past performance of an investment product. The data is based on a representative investment product or products that fully invest in the strategy. TargetRisk Programme is net of example fees and service cost of 0.95% and is shown in USD.
Source: Man Group database, Bloomberg
Figure 3: AHL TargetRisk Programme2 annual returns
11.12.2014 – 31.03.2018
5 Part year.
Past performance is not indicative of future results. Returns may increase or decrease as a result of currency fluctuations.
Source: Man Group database, Bloomberg
One should carefully consider the risks associated with investing, whether the strategy suits your investment requirements and whether you have sufficient resources to bear any losses which may result from an investment:
Market Risk – The Strategy is subject to normal market fluctuations and the risks associated with investing in international securities markets and therefore the value of your investment and the income from it may rise as well as fall and you may not get back the amount originally invested.
Financial Derivatives – The Strategy will invest financial derivative instruments („FDI“) (instruments whose prices are dependent on one or more underlying asset) to achieve its investment objective. The use of FDI involves additional risks such as high sensitivity to price movements of the asset on which it is based. The extensive use of FDI may significantly multiply the gains or losses.
Model and Data Risk – The Investment Manager relies on quantitative trading models and data supplied by third parties. If models or data prove to be incorrect or incomplete, the Strategy may be exposed to potential losses. Models can be affected by unforeseen market disruptions and/or government or regulatory intervention, leading to potential losses.
is the Head of Client Portfolio Management at Man AHL (‘AHL’) with principal responsibility for client communication. Prior to joining AHL in 2011, Dr Robertson developed capital structure arbitrage strategies at KBC Alternative Investment Management and equity derivative relative value models for Vicis Capital. He started his career at Credit Suisse in fixed income markets before moving to Commerzbank where he established the relative value team and subsequently became Head of Credit Strategy.
Graham holds a DPhil from Oxford University in Seismology and a BSc in Geophysics from Edinburgh University.
is a part of Man Group (‘Man’), a global, independent asset manager dedicated to alternative and long-only investing with USD 112,7 billion (as at: 31.03.2018) under management for institutional and private clients. Man provides shared infrastructure, services and operational support which allows managers to focus purely on investment decision making.
Opinions expressed are those of the author and may not be shared by all personnel of Man Group plc (‘Man’). These opinions are subject to change without notice, are for information purposes only and do not constitute an offer/invitation to make an investment in any financial instrument/product to which any member of Man’s group of companies provides investment advisory/any other services. Any forward-looking statements speak only as of the date on which they are made and are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. This material was prepared by AHL Partners LLP (“Investment Manager”) (company number OC380907) which is registered in England and Wales at Riverbank House, 2 Swan Lane, London, EC4R 3AD. Authorised and regulated in the UK by the Financial Conduct Authority. In Germany this information is communicated by Man (Europe) AG, which is authorised and regulated by the Liechtenstein Financial Market Authority (FMA). Man (Europe) AG is registered in the Principality of Liechtenstein no. FL-0002.420.371-2. Man (Europe) AG is an associated participant in the investor compensation scheme, which is operated by the Deposit Guarantee and Investor Compensation Foundation PCC (FL-0002.039.614-1) and corresponds with EU law. Further information is available on the Foundation‘s website under www.eas-liechtenstein.li. This material is of a promotional nature. This material is not suitable for US persons. This material is proprietary information and may not be reproduced or otherwise disseminated in whole or in part without prior written consent. Any data services and information available from public sources used in the creation of this material are believed to be reliable. However accuracy is not warranted or guaranteed. © Man 2018