Mitigate Market Risks with Absolute Return
To time markets is very difficult, if not impossible. In bull markets investors seldom think about it, but every time they crash many wish they did more to protect their portfolios. Absolute return strategies were designed to offer a degree of risk mitigation to portfolios by aiming to provide returns uncorrelated to the broader markets.
Providing added-value, distinctive, long-term investment approaches has always resonated with our values as an asset manager. Candriam is recognised among leading European absolute return providers, in terms of longevity (we launched our first fund of this type in 1996), delivery of market-leading risk-adjusted performance, and expertise. Our strong focus on Environmental, Social and Governance (ESG) factors provides our absolute return strategies with non-financial inputs, when applicable.
Achieving true decorrelation
Through our absolute return funds you can invest either only using equity exposure or a range of different asset classes. While our main objective is to provide investors with uncorrelated sources of return, we also use various tools to differentiate our strategies to avoid drawback from overcrowding with other market participants :
- Our investment process combines several independent strategies, which not only differentiates from peers but also helps reduce portfolio volatility. Some of our strategies are also supported by a blend of the efficiency of quantitative stock selection and fundamental risk analysis.
- Where applicable, we would consciously avoid taking a market position which in our view is crowded by other participants. For example, if most of our peers are positioned to benefit from a very long term market trend, we may focus instead on a shorter time horizon.
- In some cases, we manage the risk of every position very reactively in order to achieve the required level of resilience.
To better understand why many other absolute return strategies suffered during the COVID-19 market shock:
All our absolute return strategies are supported by intensive research and wealth of experience in this specific area of investment.
Key investment options
Over the years, we have developed a broad range of absolute performance strategies across long/short credit, equity absolute return, fund of hedge funds and multi-asset.
Here we take two different types of strategies out of that long list to illustrate their decorrelation from the broader markets – one focusing on equities and the second covering different asset classes.
Equity market neutral strategies gain exposure exclusively to equity markets using a discretionary statistical arbitrage approach and fundamental risk analysis.
The following chart shows the decorrelation our market neutral strategies achieved since 2016 in contrast to the performance of Eurozone equities.
Equity Market Neutral Strategy performance in contrast to Eurozone equities since 2016.
Another type of absolute return strategies that we offer takes long and short positions through Commodity Trading Advisors (CTAs) in a diverse range of investments across several asset classes. They be used for the purposes of risk mitigation within a larger portfolio, and tend to perform well during strong directionality generated by a declining market.
The following chart contrasts the performance of CTA strategies with an index of fifty largest European stocks. It shows how this type of absolute return strategies had a positive correlation with the market when it rose and a negative correlation when it experienced declines. At the same time, these strategies aim to have no correlation with most asset classes over the long term.
Performance of European equities and strategy correlation
Source: Bloomberg, Candriam between Jan 2007 to Dec 2020. The EuroStoxx 50 Index is not a benchmark for any of Candriam’s CTA-based absolute return strategies.