OUR INVESTMENT PHILOSOPHY
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While we are intimately familiar with the breadth and depth of the academic literature on investments and finance, philosophically we believe that the returns from investing can essentially be reduced to a form of compensation received in exchange for assuming risk.
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This definition of investing is the point of departure for five foundational precepts that together comprise our investment philosophy.
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The primary point of departure of any investment decision is an assessment of the risk of the investment; only after that assessment is made can an estimation of the expected return for assuming the risk be determined.
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Portfolio construction likewise begins with the determination of a risk budget and return objective and then assesses expected returns within the confines of those parameters. We recognize that all risks are not quantifiable, and have an acute appreciation for immeasurable risks, or uncertainty.
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All investing is a forward-looking exercise that requires refined and highly developed risk and return expectations, forecasts, and estimations. Empirical research, in contrast, is backward-looking and, while it can inform expectations, it cannot necessarily be extrapolated into expectations.
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A discriminating appreciation of both cyclical and secular shifts in economies, geographies, industries, as well as in the evolving structure of capital markets, are a prerequisite to establishing meaningful, useable expectations.
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Although the macroeconomic factors driving markets shift over time, we believe that the behavioral biases that impact humans when participating in markets do not change.
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This results in price patterns and trends which are often repeated across markets. We believe that alternative strategies can be constructed with the aim of identifying and profitably exploiting such trends and price patterns.
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There is a large dispersion of returns in managed investments as managers employ different strategies, signals, time frames and risk allocation methods in trading markets and managing capital.
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Combining different managers, and combining allocations to different alternative strategies can diversify a portfolio, enhance returns and dampen portfolio volatility.
Long-Term Approach
Vigilance
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An important pillar of our philosophy is the importance of investing for the long run.
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We believe that successful investing in the alternatives universe requires the ability to identify managers with repeatable and scalable investment strategies.
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It also requires an ability to stick with managers through periods of difficult performance rather than reacting to short-term trends in performance.
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We aim to construct robust investment menus which can perform through the cycle rather than optimizing portfolios based on past performance.
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Investing is a continuous and dynamic process that does not begin with the asset allocation decision nor end with execution.
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Rather it requires a constant and ongoing vigilance whereby each component of the investment philosophy – risk, expectations, context, and execution – is regularly examined, challenged, and either revised or reconfirmed.
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All disciplined and properly constructed investment processes are predicated on this robust dynamism.
Risk Management First
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Investors typically spend an inordinate amount of time contemplating the return characteristics of their investments.
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Conversely, they tend to exhibit negligent behavior in terms of assessing and measuring the risk component associated with their individual investments as well their portfolio as a whole.
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We at AlphaTrend, are proponents of a “risk-management first” mindset and all of our analysis is conducted on a risk-adjusted basis.
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Eliminating large losses is the best way to grow capital over time. Our entire approach emanates from this principle.
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As evidenced on the next slide, losses are asymmetric and impairment-caliber drawdowns are nearly impossible to recover from.
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We strive to build our investment stable with investment teams that are exceptional risk managers within their volatility budget in order to substantially mitigate impairment risk.
Impairment Risk
INVESTMENT SELECTION
PROCESS
AlphaTrend implements a fundamentally-based investment process, coupled with a disciplined approach to strategy allocation, manager selection and portfolio monitoring.
Risk management is incorporated throughout every step of our investment selection process, and is an integral component of manager evaluation and portfolio construction from start to finish.
MANAGER EVALUATION
AND SELECTION
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We combine qualitative and quantitative analysis of managers to assess competitive advantage and ability to generate alpha.
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We engage managers at multiple levels of seniority and responsibility (holistic team perspective) and we perform extensive diligence on managers’ operational, business and legal infrastructures, employing proprietary and third-party reference check systems.
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Identifying best in class managers requires diligent analysis of a combination of factors, including investment style, performance, volatility, and operational infrastructure.
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Our manager selection philosophy is based on proactive sourcing and in-depth analysis, through which we seek to identify quality and build high conviction views.
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Through our dynamic sourcing, we actively seek alternative investment opportunities, many of which may not be widely available.
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We seek well-resourced and specialist/niche managers with expertise in defined segments such as a particular geography or sector, and a track record over different market cycles.
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Our in-depth analysis helps us identify attractive investment opportunities and effectively negotiate with fund managers.
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With our emphasis on quality, we prioritize investment performance and high-quality service in both our work and the work of managers we select.
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Regardless of the attractiveness of a proposition, however, we will not typically invest in funds for which we cannot conduct a full risk assessment.
STRATEGY ALLOCATION
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We analyze fundamental data and capital market trends to assess relative attractiveness of various investment strategies.
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We anticipate shifts in public policy (including fiscal and monetary policy) and determine potential impacts on our investment eco-system and on investor portfolios.
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We perform in-depth primary research on high-priority topics to form timely and differentiated views on market themes.
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We construct diversified, high-conviction investment portfolios using a “core/satellite/opportunistic” model, aiming to be relatively concentrated by manager while well-diversified by strategy.
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We tailor investment menu exposures specifically to client objectives.
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We utilize constrained mean-variance optimization techniques as well as proprietary risk metrics as an integral part of the investment menu construction process.
MANAGER AND PORTFOLIO MONITORING
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We perform detailed monthly reviews of manager performance, positions, and risk exposures based on quantitative data and regular conversations with managers.
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We assess material operational developments through continuous monitoring.
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We supplement monthly manager reviews with comprehensive formal updates on an annual basis.
PORTFOLIO CONSTRUCTION
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The overall objective of asset allocation is to deliver the highest returns per unit of risk, where risk is usually defined in terms of volatility.
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In finance, the ratio of a portfolio’s return to its volatility is called the Sharpe ratio, and this is one of the most fundamental measures of investment performance.
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AlphaTrend’s asset allocation approach harnesses two of the most powerful smart beta factors namely momentum and low beta, to build and regularly calibrate diversified portfolios of traditional instruments and alternative strategies in response to material changes in world markets.
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AlphaTrend mandates are built to target a specified level of portfolio risk in order to accommodate investors’ diverse risk preferences.
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To manage portfolios to different risk targets, portfolio composition will often vary across mandates; for example, lower risk mandates would be expected to hold a larger proportion in lower volatility strategies on average, while more aggressive mandates would exhibit a higher beta strategy bias.
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Where necessary, overall portfolio exposure will expand and contract in response to observed changes in portfolio risk.
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AlphaTrend’s asset allocation approach centers around building a solid “weather-proof” core composed of consistent strategies which have little or no correlation to financial markets and supplementing this core with peripheral investments on an opportunistic basis.
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While more conservative mandates will typically only include the core holdings, more aggressive mandates will incorporate higher beta strategies at opportune junctions in the investment cycle in order to enhance returns.
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This dynamic and adaptive approach to asset allocation ensures that portfolios are “in tune” with economic and market conditions.
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AlphaTrend strives for a risk / return equation that far supersedes outcomes that are derived from more conventional and often simplistic asset allocation methods such as equal-weight investing and modern portfolio theory.
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AlphaTrend feels that these more conventional methods overly rely on fundamentally flawed backward-looking optimization techniques.