Asset classes

Absolute TAA practical applications

Absolute TAA represents a flexible and dynamic building block for a range of institutional portfolios. Central to this is the strategy’s ability to produce relatively consistent returns that have low or negative correlations with traditional sources of investment return.

Portable-Alpha

An example of Portable Alpha would be for an investor looking to gain exposure to a developed investment market (eg US) but unhappy with the probable returns, as the US has historically been a difficult market for managers to consistently outperform. The investor is able to gain exposure to the market risk via futures contracts (using a small proportion of the assets to cover margin calls). This allows the investor to access the US market, while simultaneously capturing the alpha from ATAA.

Core/satellite and Liability-driven investment

For core/satellite and liability-driven investment approaches, where a large proportion of the assets are committed to either beta capture or to liability matching, the inherent capital efficiency within ATAA helps to ensure that scheme sponsors are able to maximise the level of return, with respect to both a scheme’s capital budget and its risk budget. For example, an investor looking to employ a core/satellite approach with global equities may make an 80% allocation to index-trackers, leaving only 20% to allocate to alpha generating, low-correlation investments. As allocations to ATAA are capital efficient, this typically leaves more funds free for other high-alpha allocations, allowing for an improved level of diversification within the alpha-basket.

The move from balanced to specialist

The overriding institutional trend over the last decade has been the move from a balanced to a specialist investment approach. Scheme sponsors have typically found that after making this transition there is a much greater tendency for the total portfolio to drift away from strategic allocations, as oversight of the fund is no longer consolidated under a single investment manager. In addition, the TAA overlays employed by the balanced manager are likely to have been “lost in transition”, meaning a valuable source of alpha has effectively been lost at the portfolio level. By running a segregated ATAA strategy against a customized benchmark, institutional investors are able to maintain the integrity of their strategic asset allocations, rebalancing the portfolio, to the strategic asset allocation benchmark. However, more commonly, ATAA strategies can be used to take tactical positions around the strategic benchmark to generate additional returns.