1OAK Liquid Alternative Beta is a systematic cross-asset absolute return strategy which aims to outperform the hedge fund industry on a risk-adjusted basis whilst offering daily liquidity. The strategy was launched in 2012 and trades liquid futures and other instruments on equity indices, sovereign bonds, rates, FX and commodities.

Benefits

Investors in the 1OAK Liquid Alternative Beta strategy can achieve diversified hedge fund-like returns through a single investment with no manager selection risk, low fees & charges and daily liquidity.

Target Market

The strategy is designed for professional investors who are looking to generate positive absolute returns which have only a moderate correlation to equity markets.

Purpose

The strategy may be used as a diversifying or alternative component within a mixed-asset portfolio or where the investor wants to have broad hedge fund exposure.

Characteristics

The strategy will have characteristics similar to a diversified hedge fund portfolio with 7-9% volatility. The degree of correlation to equity markets will reflect that of the broader hedge fund universe and will vary through time. At present the strategy exhibits a positive but moderate correlation to equities.

Investment Objective

Liquid Alternative Beta aims to outperform the broader hedge fund industry, with target annualised volatility of 7-9% and whilst limiting drawdowns.

Philosophy

There exists a very broad range of hedge funds investing across different markets, strategies and assets, with an equally broad range of performance and risk/return characteristics.

However, in aggregate, hedge funds do generate positive absolute returns, which can be seen in the performance of broader hedge fund indices. These returns can be largely explained by identifying the instruments, factors and strategies that hedge funds have exposure to.

LAB seeks to replicate or improve on hedge fund returns through a statistical estimation of the exposures of hedge fund capital. This allows LAB to generate hedge fund-like returns by trading the major factors driving these returns using liquid assets. LAB also aims to lock in a structural outperformance of hedge fund returns due to a lower fee loading, which compounds over time.

Investment Universe

LAB has a broad investment universe comprising liquid futures and other instruments on equity indices, sovereign bonds,
rates, FX and commodities globally. LAB may have long or short positions in any asset class.

Investment Process

LAB utilises proprietary statistical methodologies and portfolio management techniques researched and implemented over ten years.

A statistical estimation of the exposures of hedge fund capital is used to identify the factors that are driving hedge fund returns. Allocations are then made to these risk factors, with positions re-evaluated daily based on rapidly-changing signals, allowing for flexible positioning. The volatility target is an intrinsic part of the allocation process.

The strict implementation of a risk management framework has enabled the strategy to maintain a stable performance and controlled volatility over its life, limiting drawdowns over periods of weak returns for hedge funds. It includes a de-risking process that is used only when the investment management committee considers that there is a potential significant threat to performance, typically in anticipation of a binary event that may have a significant effect on market values or which could cause a significant increase in volatility.

Return analysis

Strategy performance

Statistical analysis

	1Y	3Y	5y	Since Inception
Cumulative Return	18.6%	23.1%	47.7%	74.0%
Annualised Return	17.7%	7.3%	8.2%	6.5%
Annualised Volatility	8.0%	6.2%	6.3%	6.8%
Sharpe Ratio	2.22	1.17	1.30	0.96

Monthly performance

Features

LAB allows investors to access hedge fund-like returns whilst avoiding many of the main problems that face investors allocating to hedge funds:

• Hedge fund returns are very diverse. Even within similar strategies there can be significant differences in the performance between the best and worst funds. LAB allows access to hedge fund returns without exposure to single-manager risk.
• There are significant costs and charges associated with investment in hedge funds both in terms of management/performance fees and the costs of researching single managers. LAB fees and charges are a fraction of typical hedge fund charges. Reduced fees feed straight through to better performance.
• Hedge funds may have unstable risk & return characteristics. LAB is managed using a target volatility constraint allowing the investment process to deliver a steady risk profile.
• Hedge funds suffer from style drift as sources of return and managers’ methods change over time. LAB has a clear, simple and well-defined investment strategy that does not vary over time yet continues to consistently match or better hedge fund performance in aggregate.

Availability

LAB is available as a managed account on a number of platforms, including an implementation on Deutsche Bank’s dbSelect platform. It is also available as a listed actively-managed certificate and in total-return swap form.

PM Commentary

LAB realized a monthly return of 0.3% in February of 2021 and an annualized volatility of 12%.

The strategy was majority long equities for the month of February, with the bulk of its risk allocation in US equities (S&P 500 and Russell 2000 futures). This was followed by long positions in FTSE & Hang Sang futures. Additionally, the strategy held a short position in the German DAX. The bulk of LAB’s fixed income exposure came through long Canadian 10-year bond futures. This exposure was somewhat offset by a short position in Treasury Long Bond futures. The effect of this pair was a bet on shorter duration assets outperforming, as well as the steepening of the global yield curve. Overall, the portfolio was positioned ‘risk-on’, while its equity short and aggregate long bond positions provided a ballast.

The month of February saw a dramatic increase in yields. As such our Canadian 10-year position was the main drag on performance but the long duration Treasury Long Bond futures outperformed. Our long equity positions all rose in value during the period, with our short DAX acting as a minor drag.

 

Current Portfolio

Portfolio positioning – last 6 months

1y rolling correlation to bonds and equities

Correlation Matrix

Risk

Market Risk: the value of assets held by the strategy will increase and decrease. The value of the strategy may be adversely influenced by changing interest rates and FX rates.

Operational risk: the strategy may suffer material losses as a result of human error, failures of systems and processes and inadequate procedures and controls.

Model Risk; the process used to determine long and short positions may fail to accurately calculate the factors driving hedge fund returns.

Derivative/leverage risk; the strategy uses derivatives to get exposure. The use of derivatives allows the strategy to have leveraged positions. Increased leverage may result in losses greater than the amount invested.