AC Risk Parity 12 Fund

Best Performing Macro Systematic – Risk Parity Fund

Originally published in the April/May 2013 issue

Aquila Capital’s Risk Parity strategy was, at launch in 2004, the first risk parity product in Europe. It switched into a UCITS structure in 2008, which was also a strong year for the AC Risk Parity 12 Fund with returns of 11.33% for the strategy. Returns of 9.85% in 2012 were higher than most CTAs or macro funds. The 12 in the name denotes the risk target, in terms of annual volatility.

The same strategy is also available in funds targeting volatility of 7% or 17% and clients can dial up or down to different risk targets through dedicated managed accounts. A large number of currency share classes are also on offer: euros, Swiss francs, British pounds, US dollars, Australian dollars and Singapore dollars are currently available, and other currency share classes could be set up in response to client demand.

The risk parity concept is central to the fund’s investment philosophy, which argues that asset allocation should be calibrated to equalise the risk contribution and not the cash value of asset classes. Aquila’s quant team, co-headed by Harold Heuschmidt and Dr Dieter Rentsch, also contends that diversification is the cornerstone of successful investment. The realised Sharpe of the strategy since inception has been 0.79: roughly double the long-term standalone Sharpe for any of the asset classes invested in. Equities, bonds, interest rates and commodities are the four asset classes chosen, based on the fact that these asset classes are liquid, offer some form of risk premium and have low correlation to one another.

Liquid beta, to pick up risk premiums, is therefore the core engine of the fund’s systematic investment process, accounting for the majority of returns. The core investment portfolio is based on equal risk-adjusted weightings to equities, government bonds, short-term interest rates and commodities. The starting point has each accounting for 25% of the portfolio in terms of risk exposure. Considerable attention is devoted to selecting the instruments used to achieve the desired exposures in each asset classes. A range of index products or swaps are traded, including “smart beta” products, which have been designed to produce better risk-adjusted returns than traditional benchmarks.

On top of the basic beta and smart beta, some alpha is also sought through insights derived from behavioural finance. A proprietary portfolio optimisation model draws on a series of behavioural indicators, such as smart money and the seasonal effect, to review and rebalance the allocation of the core portfolio to the four asset classes. Risk allocations to each of the four assets range between 15% and 35%, or 10% either side of an equally weighted 25%.

The limited deviations from equal asset class weightings are one consequence of the firm’s risk management approach. Renowned academic professor Dr Harry M. Kat plays a key part in Aquila’s quant research, and the FundCreator risk management system that he developed with Dr Helder Palaro monitors and optimises risk on a daily basis. Maximum monthly losses are limited by a floor that is varied according to the volatility target, with 7% the highest calendar monthly loss tolerance for the fund targeting 12% volatility. This strategy’s worst actual monthly loss has been 5.93%, comfortably inside the 7% floor.

The system also aims to deliver a normal or symmetrical return distribution, avoiding the negative skews and fat downside tails that most financial asset classes display. The optimisation process has also helped to maintain the aims of low correlations to European equities and bonds, of 0.11 and 0.17 respectively.

The Risk Parity strategy has a diverse investor set and makes up €2.1 billion of Aquila’s €4.2 billion assets under management, which also include real asset strategies such as agriculture, timber and renewable energies. The level of assets makes Aquila one of Europe’s largest 50 alternative asset managers, ranked by assets. Independently owned and operated, Aquila Capital was founded in 2001 by Roman Rosslenbroich and Dr Dieter Rentsch.