With diversification and risk management top of investors' wish lists when it comes to alternatives, step forward the H2O MultiReturns Fund.
H2O Asset Management is an independent boutique backed by Natixis Global Asset Management and has a 14-year track record in absolute return strategies.
Jeremy Touboul, who works on the H2O MultiReturns Fund alongside group co-founder Vincent Chailley, says the product is designed to bring some unique attributes to the crowded absolute return global macro space.
One element is an income: if investors select the distribution share class, they are entitled to distributions from the underlying equities and bonds.
A second is the volatility bracket used: rather than targeting a set level like many peers, the H2O team runs the fund with volatility between 5% and 10%.
‘Where there are shocks in the market and we see waves of forced sellers, this flexibility allows us to increase our volatility in order to take advantage of conditions,' says Touboul. ‘When conditions are quieter, volatility will be lower and using the flexibility afforded by the 5-10% bracket allows us to move with the market.'
At the core, H2O MultiReturns invests across equities, bonds and currencies on a global level, seeking to beat one-month sterling Libor by 4% per annum over a three-year time horizon.
Touboul says the fund can serve as a good diversifier in a global portfolio, with a low correlation to various asset classes and its peer group.
Looking at figures from the fund's first year after launch in October 2013, it had a negative correlation with gilts and respective figures of just 0.25 and 0.22 with equities and high yield.
Lack of correlation with the peer group comes from the very different process in place, which Touboul says combines short- and long-term thinking as well as a range of directional, relative value and thematic calls.
‘This is a global macro product so the initial stage is detailed economic analysis and discussion across the team to provide what we call our views sheet,' says Touboul. ‘We look at things differently from many rivals, with separate teams analysing valuations, fundamentals and flows. All of this information is fed into Bruno Crastes and Vincent Chailley who decide how best to express these views across our investment universe.'
A good way to understand the process is to imagine a pyramid with four asset class channels, government bonds, credit, currencies and equities at the top.
There are three layers as we move down the pyramid where H2O looks to add value: first up is a broad directional call in each area - for example, in currencies, whether to be long or short the US dollar.
Next up are relative value plays and finally come specific or thematic positions, both emanating from that initial call.
‘Looking at currencies, our directional call is be long the US dollar at present based on a positive view on America's economy plus various technical factors,' says Touboul.
‘At the relative value stage, we are currently short the euro versus the dollar and long sterling against the euro. Moving finally to the specific plays, we are short emerging market currencies.'
H2O's process works in a similar way on the other three channels, establishing whether to be long or short G4 government bond duration, credit and equity markets depending on conditions.
At the end of this detailed process - or at the bottom of the pyramid - are 12-15 investment themes making up the H2O MultiReturns Fund portfolio.
Risk mitigation is a key factor in the case for investing in alternatives and Touboul says the team treats risk as an integral part of the process: very much an input rather than an output.
‘Every view we have goes through a risk optimiser to determine the best allocation,' adds Touboul. ‘If we have a very strong view on the US dollar for example, this optimiser might put a limit on our exposure to avoid skewing risk too far in one direction - every decision is reviewed in the context of the overall portfolio from a risk/reward perspective.'
Looking at the team's' current macro views, Touboul says they are on the hawkish side of the US Federal Reserve, expecting to see higher interest rates as early as September. ‘With that in mind, the greatest risk at present is general complacency and we feel the market is underestimating rate hike risk,' he adds. ‘If rates do rise earlier than expected, that could cause another taper tantrum and a bout of panic selling.'
Key calls on the H2O MultiReturns Fund in light of this include the long dollar position, longs in European bonds and equities versus US equivalents and a play on the flattening yield curve in the US.
Elsewhere, the team is currently short G4 government bond duration, broadly neutral on equities and continues to favour a spread compression play in Europe by being long peripheral sovereigns.
Please read the prospectus and Key Investor Information carefully before investing, available at http://ngam.natixis.com/uk.
This material is provided for information purposes only to certain investment service providers and other Professional Clients, and its distribution may be restricted in certain countries. This document may not be distributed, published, or reproduced, in whole or in part. • Any analyses and opinion referenced herein represent subjective views of the investment adviser(s) as referenced. Jeremy Touboul was interviewed for this article on 15 May 2015. These, as well as certain of the investment themes and processes, are as of the date indicated and are subject to change. There can be no assurance that developments will transpire as may be forecast in this material.
Natixis Global Asset Management consists of Natixis Global Asset Management, S.A., NGAM Distribution, L.P., NGAM Advisors, L.P., NGAM S.A., and NGAM S.A.'s business development units across the globe, each of which is an affiliate of Natixis Global Asset Management, S.A. The affiliated investment managers and distribution companies are each an affiliate of Natixis Global Asset Management, S.A.
NGAM S.A. is a Luxembourg-based management company authorised by the Luxembourg financial regulator (the CSSF). The investment manager of the Fund is H2O Asset Management LLP, a subsidiary of Natixis Global Asset Management, authorised and regulated in the UK by the Financial Services Authority, registered no. 529105. Approved for use by NGAM UK Limited, which is authorised and regulated by the UK Financial Conduct Authority.
