1OAK Uncorrelated Quantitative Strategies aims to generate absolute returns whilst being truly uncorrelated to equity markets. The strategy allocates between alternative risk premia strategies on a variety of liquid asset classes which themselves have no or low correlation to equity markets.
The strategy is designed for professional investors who have a need for an investment that can generate positive absolute returns with no correlation to equity markets.
The strategy may be used as a diversifying or alternative component within a mixed-asset portfolio or as a replacement for an allocation to bonds.
The strategy is designed to be both statistically and fundamentally unrelated to the rest of a typical multi-asset portfolio. It aims to have negligible correlation to developed equity market returns and a Sharpe ratio greater than 1.
UQS aims to achieve absolute positive after-fee returns of cash plus 8-10% with a target annualised volatility of 8-10%. The strategy aims to have no correlation with equity markets in all market conditions.
There are a number of alternative risk premia that exist in markets today. These are sources of return that are persistent, exploitable and are not dependent on the direction of traditional asset classes. Equity factors like value, quality, momentum, volatility and carry are perhaps the best-known, however there are many other alternative risk premia that can be identified across all asset classes.
Alternative risk premia can be isolated and extracted using quantitative strategies, enabling the generation of returns that are uncorrelated to markets.
With appropriate expertise, these strategies can be combined into a portfolio that can provide capital growth independent of equity market cycles and long-term movements in interest rates.
UQS allocates between a universe of strategies developed by a number of investment banks available in total return swap form. These strategies use long and short positions in liquid securities, futures and options across asset classes such as equity, currency, commodity, rates and credit. The investment universe is restricted to strategies that have a meaningful track record.
In order to produce a portfolio that achieves the objectives of no correlation to developed market equities whilst still generating a positive return, UQS uses quantitative and qualitative methods to screen, classify and combine strategies.
Firstly, strategies are classified by their characteristics — such as correlation to equity markets, convexity, certainty of protection and carry.
Importantly, there is a discretionary screening process to ensure returns are a result of a structural imbalance rather than statistical artefact, and that the alternative risk premium can be reasonably expected to persist under the current market regime.
The most effective strategies are then selected to populate two baskets — one basket that aims to generate uncorrelated returns, and a defensive that provides protection in stressed market conditions. Strategies that correlate to equity markets are excluded from both baskets; in practice, this means no exposure to strategies that underwrite equity market risk.
Within each basket we use different quantitative methods to allocate between strategies. This ensures a broad range of alternative risk premia contribute to overall returns without restricting the protective qualities of strategies within the defensive basket.
Finally, both baskets are combined using a fixed weighting.
There is a pressing need for investments that offer the genuine diversification provided by UQS:
- In an environment where interest rates are at very low levels and there is a growing risk that rates increase, there is less willingness to hold bonds as a diversifier. UQS provides a genuine alternative, one that is uncorrelated with equity markets yet generates at least some positive carry.
- Listed alternatives such as REITs, infrastructure investment trusts and listed private equity tend to move with equity markets, and in many cases have significant duration exposure. UQS is specifically constructed to have negligible equity market beta.
- Mainstream absolute return funds have not performed in line with expectations, especially in times of stress, typically because they contain risk-underwriting strategies that expose them to market beta in falling markets. UQS specifically excludes strategies that are correlated to equity markets. In practice this excludes most risk-underwriting strategies.
UQS is available as a listed actively-managed certificate and as a managed account. 1OAK is currently in discussions with cornerstone investors for a UCITS fund based on the strategy.
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.
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.