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Issued by 1OAK Capital Limited, authorised and regulated by the Financial Conduct Authority. 1OAK Capital Ltd (1OAK) (Registered in England & Wales Number: 06890293; FCA registration number 501453) provides fund management services for its customers. 1OAK Capital Limited is authorised and regulated by the Financial Conduct Authority. Registered Office of 50 Sloane Avenue London SW3 3DD.

Main Points

  • Interest in alternative UCITS funds has increased as investors look for uncorrelated investments
  • Hedge fund replication can offer hedge fund index-beating returns with lower fees, less risk and better liquidity
  • 1OAK LAB is a tried and tested hedge fund replication strategy with a nine-year track record

Introduction

With interest rates at rock-bottom levels and the prospect of rising inflation, many investors are now looking for investments that will be resilient and which do not depend on rising equities and falling bond yields to generate a profit. As a result, there has understandably been a sharp increase in interest in alternative strategies.

Hedge funds are perhaps the original alternative investment. They can offer diversification to equities and bonds through a complementary risk/return profile. Hedge funds were, and are, restricted to large institutional investors. Too often, restricted liquidity, high fees and charges and investment restrictions prevent their use in discretionary portfolios for retail investors.

The last ten to fifteen years has seen the development of absolute return, liquid alternative funds and hedge funds offered as UCITS funds. Unfortunately, the hype that surrounded the launch of these funds has in many cases failed to be matched by performance. The AH Global UCITS Index reflects the performance of over 600 Alt Ucits funds with $209bn AUM at the end of Feb 2021 and so is a good way to measure the performance of this type of fund. The broad index has recorded a gain of just 16.8% since the beginning of 2010, an average annual return of only 1.57%. The HRFX Global Hedge Fund Index has recorded a gain of 21% over the same period.

UCITS funds that use hedge fund replication strategies have clear and obvious benefits, in particular the ability to provide access to similar exposures to hedge funds, at vastly reduced cost. These strategies emerged around 2007, based on academic work starting towards the end of the last millennium and further developed by academics, investment banks and a select group of investment managers. There was a flurry of activity around 2010 with banks and asset managers launching products.

Since then, some have done better than others. To be fair to some of the early products, the market has evolved significantly over this period. In particular, the volume and quality of hedge fund performance data has improved over the years and there are now many more indices of hedge fund returns, most of which are now calculated daily. Replicators now have more, better data to work with.

Seven reasons

1OAK Liquid Alternative Beta was launched in 2012 and is one of the strategies that has delivered attractive returns over the last nine years. It allows investors to achieve diversified hedge fund-like returns through a single investment with no manager selection risk, low fees & charges and daily liquidity.

Here are seven reasons why investors should consider using LAB in their portfolios

  1. LAB is a tried, tested, systematic and disciplined strategy that matches or betters actual hedge fund returns. LAB has been used to run real money since 2012. Over this period, it has offers steady returns with an attractive Sharpe ratio. The realised performance of LAB has bettered HRFI, the Absolute Hedge Index of alternative UCITS funds (based on the performance of $209bn AUM) and trounced the AH Multi Strategy Index ($20bn AUM).
  2. Benefit from the wisdom of crowds. The asset allocation in LAB is derived from detailed analysis of the returns of an index of the best-performing hedge funds. The strategy can identify the assets that these funds hold and the assets in which they hold short positions. The LAB asset allocation is recalculated daily to ensure that the positions are contemporary and accurate.
  3. No structural correlation. LAB, like most indices of hedge fund returns has a degree of positive correlation with equity market returns. However, this is not structural, but reflects the net exposure of the underlying funds. If the underlying hedge funds reverse their position, LAB could just as easily have negative correlation to equity returns.
  4. Reduce costs and charges — particularly compared to a UCITS fund of hedge funds. Hedge funds have managed to retain a premium pricing regime. A 2% & 20% charging structure will make a significant dent in the returns that the end investor receives. A fund of hedge funds will then incur an additional layer of fees for the manager and administrator. Lower fees help LAB offer better returns than more expensive funds and improves the returns that investors can receive. These benefits compound over time.
  5. Reduce time, effort, cost, and risk selecting individual funds. The realised dispersion of returns from one fund to another, even among funds that have similar strategies, means that investors that want to invest in individual funds must spend time, effort and money researching and selecting funds. This needs to be a constant process if investors want to avoid manager style drift. LAB offers broad hedge fund exposure and so eliminates the need to do due diligence on individual funds.
  6. Eliminate idiosyncratic risk associated with single equity selection. LAB can have exposure to up to 90 different highly liquid instruments. LAB will not have exposure to individual equities or other individual assets. Individual assets can become markedly less liquid or otherwise affected under extreme circumstances. The recent shenanigans surrounding GameStop highlight the risks involved in strategies that use individual assets.
  7. UCITS eligible. LAB can be offered as a UCITS fund, it is also investible as a strategy by a UCITS fund.

Conclusions

LAB is a proven performer. In a market where new strategies and funds are touted on the back of back-tests and simulations, LAB has nine years of real-life track record and has demonstrated attractive absolute returns even in trying market conditions.

LAB offers a liquid, low-cost alternative investment that can be a useful part of a multi-asset portfolio. Investors get diversification benefits and access to a strategy that is flexible and agile.

Important information

This presentation has been prepared by 1OAK Capital Ltd (company number 6890293). The information contained in this presentation has been obtained from public and private sources believed to be reliable and the opinions, analysis, forecast, projections and expectations (together “Opinions”) contained in this presentation are based on such information and are expressions of belief only. No representation or warranty, express or implied is made that such information or Opinions is accurate, complete or verified and it should not be relied upon as such. Information and Opinions contained in this presentation are published for recipients’ reference only, and are not to be relied upon as authoritative or without the recipients' own independent verification or in substitution for the exercise of judgment by any recipient, and are subject to change without notice.

This presentation is not, and should not be construed as, an offer document or an offer or solicitation to buy or sell any investments.

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