BTV AM Alternative Investments Fund, launched in June 2023, has received The Hedge Fund Journal’s 2024 UCITS Hedge Award for Best New Launch, in the Fund of Funds – Liquid Alternative Investments category.
Germany’s FERI Group partnered with Austria’s Bank für Tirol und Vorarlberg AG (BTV), to launch a distinctive UCITS alternatives solution. FERI has served institutional investors and invested in hedge funds for more than 30 years. BTV’s 10-year business relationship with FERI started with economic and fund research and progressed into investing in other FERI products, before the two firms conceived this multi-manager offering.
BTV is a regional Austrian bank with a full banking license in Austria, Germany and Switzerland and serves corporate, family office and retail clients with focus on financial investments. “The fund of funds is used exclusively for our asset management mandates rather than being marketed externally, and currently nearly all assets come through BTV rather than FERI,” explains BTV economist and portfolio manager, Cecile Herzl, a CFA and CAIA charter holder, based in Innsbruck who has worked at BTV for ten years.
BTV’s asset management unit is led by Dr. Robert Wiesner, Head of Asset Management, who is responsible for the oversight and implementation of the strategic and tactical asset allocation. It runs about EUR 2.68 billion in various mandates across equities, bonds and alternatives. Commodities marked its first move into alternatives, and it has been investing in liquid alternatives since 2019. “The alternative investment solution is designed to add diversification on top of equities, bonds and commodities and to reduce volatility in the overall portfolio,” says Wiesner.
We focus on the experts in their respective fields, which could be short term, medium-term or long-term. The implementation of the strategy is most important.
Dr Thomas Maier, Head of Hedge Funds, FERI
“FERI has extensive experience in running hedge fund solutions both in the offshore and UCITS world,” says FERI’s Head of Hedge Funds Dr Thomas Maier, who has been with the firm for 17 years, and is based in Bad Homburg.
Though UCITS-compliant funds of funds might have some latitude to invest a certain percentage in non-UCITS, FERI takes the strict view that all underlying funds should be UCITS funds and researches the universe extensively. “We conduct approximately 800 manager conversations per year, of which approx. 20% are with managers running UCITS. Some managers run UCITS parallel to offshore vehicles. Of 170 funds FERI has allocated to since 1998, we estimate that about 40 were UCITS,” says Maier.
FERI tracks a universe of about 600 UCITS hedge funds, using third party databases, its own internal proprietary database, and its global industry network, which has contributed speakers from five continents at the annual FERI Hedge Fund Day that is regularly reviewed by The Hedge Fund Journal.
Maier recalls that, “The very first decently set-up UCITS hedge funds were equity long/short funds trading in the 2000s”. Around one third of the UCITS hedge fund universe is still equity long/short or equity market neutral strategies, and the variety has broadened out over the years. There are UCITS hedge funds focused on global, US, UK, European, Asian, Japanese and emerging market equities, as well as sectors such as technology or ESG themes including energy transition and emissions. Corporate bond and convertible bond strategies populate fixed income long/short UCITS. In the event driven space, there are classic merger arbitrage strategies, and others trading a wider spectrum of corporate events. In macro, investors can choose between purely discretionary fundamental approaches, purely systematic strategies and others that can be called “quantamental” and combine both approaches. Systematic strategies also include systematic fundamental macro, as well as traditional trend following CTAs and other quantitative approaches that may pursue shorter term trading and can also use machine learning or artificial intelligence. There is also a wide range of volatility arbitrage and directional volatility strategies with a strong cluster of expertise in Germany.
Some of these systematic UCITS are explicitly labelled as being wholly focused on “alternative risk premia or risk factors” such as trend or carry, while others are partly seeking to capture risk premia, and another cohort of funds are mainly or wholly searching for market inefficiencies. Some sorts of risk premiums and associated strategies do not however align well with UCITS funds’ twice monthly (at least) dealing frequency. “We would not expect to earn illiquidity premia from strategies such as structured credit or distressed debt in a UCITS,” says Maier.
We are agnostic to different strategies and environments. We balance the return drivers independent of politics and the overall environment.
Son Nguyen, Co-Portfolio Manager, BTV AM Alternative Investments Fund
FERI surveys the whole UCITS hedge space. In FERI’s hedge fund expert team, there are specialists in the major styles: equity hedge, event driven, tactical trading, global macro and CTAs, commodities and quantitative trading, as well as relative value strategies. Operational due diligence is conducted via desk research, onsite visits, background checks and reference calls around the globe of managers running all sorts of funds, including UCITS and non-UCITS.
Manager selection is 100% bottom-up, though top-down analysis of asset classes and strategies helps to determine weightings in the portfolio. “There is aways some trade-off between both. We might pick a great manager, even if we are neutral on the strategy. And we will maintain the protection bucket of long volatility strategies in this fund even if we expect low returns from it,” says Maier.
The BTV AM Alternative Investments Fund has been running for nearly one year and is currently invested in ten funds in five sub-strategies with low turnover. It anticipates allocating to between eight and 12 funds. The ten funds as of April 2024 have an average age of five years, but some of their managers have been around for decades. “When analyzing a candidate fund, we consider many factors: strategy with low correlation with traditional assets (stock, bonds, commodities), strong operational setup, experienced and stable team, transparency in report and communication as well as favorable fees conditions,” says Son Nguyen, Co-Portfolio Manager of the fund.
There are two equity market neutral funds: a London-based, discretionary equity market neutral strategy using fundamental analysis to trade mainly in UK equities and a San Francisco-based systematic equity market neutral fund focused on Asia Pacific Region.
In event driven, there is a London-based strategy focusing on merger arbitrage and other corporate events, mainly in equities but with some limited liquid credit exposure; this firm was founded by a manager who has featured in The Hedge Fund Journal’s 50 Leading Women in Hedge Funds report. There is also a London-based multi-strategy fund, which replaced a New York-based one in relative value bucket.
In tactical trading, there is a London-based global macro multi-asset risk parity fund, which can go long and short. There is also a Los Angeles-based short term systematic trader that has a track record of over 30 years. This does not necessarily reflect any special preference for shorter term systematic strategies. FERI covers the full spectrum of systematic trading time frames. “We focus on the experts in their respective fields, which could be short term, medium-term or long-term. The implementation of the strategy is most important,” says Maier.
Though volatility strategies make up quite a small percentage of the overall hedge fund universe, this product focuses on absolute returns, does not have to pay any attention to any benchmark asset weightings of different hedge fund strategies, and allocates approx. 30% to volatility strategies. “This is by design: the two long volatility managers have been negatively correlated to the rest of the portfolio,” says Maier. They are a Germany-based systematic global volatility fund that generally has long volatility exposure, and a Paris and Tokyo-based global equity volatility index arbitrage strategy trading Nikkei and Asia options. The third volatility manager is a Germany-based volatility arbitrage strategy arbitraging implied versus realized volatility.
The most unusual allocation is a Swiss-based fund owning a diversified portfolio of insurance linked securities (ILS). “This is a somewhat tactical allocation based on this risk premium being relatively attractive at present. From time to time, we will allocate to interesting risk premiums if it is possible to do so in UCITS,” says Maier.
The others are all intended to be through the cycle holdings, to provide an all-weather return profile. “We will not shoot the lights out and do not expect to make permanent double-digit returns. We are agnostic to different strategies and environments. We balance the return drivers independent of politics and the overall environment,” says Nguyen.
FERI is aware of macro risks such as central bank tightening, inflation, recession risks, China economy risks, geopolitics, deglobalization, new blocs and conflict escalation, but this does not guide the asset allocation or manager selection. There is no tactical overlay, and FERI does not expect to use daily dealing on some funds to express tactical views. “The daily dealing feature could be helpful for managing inflows and outflows, but we would not adjust the book based on macro views,” says Maier.
The proprietary in-house risk management system named FERI Alternative Risk Tool (ART) gives full exposure transparency, normally using monthly data, though it has potential to work with real time data as well. “The system can also carry out regressions on the fund and portfolio, using more than 400 risk factors in ten groups. A non-linear regression prioritizes the factors and sectors with the highest impact on fund returns,” says Nguyen.
For instance, using one snapshot in 2024, the healthcare equity sector might have statistical impact on BTV AM Alternative Investments Fund. According to the sensitivity test exercise, “A one standard deviation up move of 5.3% could produce a positive 0.7% return and a one standard deviation down move of 4% could generate a minus 0.5% return according to the model,” says Maier. The most statistically relevant equity style was minimum volatility global, where a one standard deviation up move of 3.3% would earn the fund of funds 0.4% and a one standard deviation down move could cost the fund 0.5%, the model results suggest.
The alternative investment solution is designed to add diversification on top of equities, bonds and commodities and to reduce volatility in the overall portfolio.
Dr. Robert Wiesner, Head of Asset Management
Sensitivities to geographic regions, market cap sizes, currency pairs, inflation linked bonds, high yield credit, yield curve term structure, precious metals and equity volatility were also highlighted. This is a dynamic exercise, and different factors from the library could land in the top ten in future.
Stress tests also use the current portfolio’s factor exposures to gauge sensitivity to historical events over the past 40 years, such as the 1987 stock-market crash, 1994 Fed rate hikes, 1997 Asian crisis, 1998 Russian default and LTCM crisis, 2000 TMT bubble bursting, 9/11, the GFC, European sovereign debt crisis in 2011 and Covid in 2020. The simulated performance during these episodes ranges from approximately zero to minus 3.4%, which is much less than the worst losses in equity markets over those meltdowns, showing the portfolio’s resilience in market turmoil.
The risk factor analysis is used for stress testing but not to change the size of allocations. Currently, the ten funds have roughly equal weights in nominal terms, rather than equal risk contributions, and this is expected to be typical. “It could however vary with risk levels and the opportunity set,” says Maier.
The factsheets show some very small net exposures to equity and credit, but after adjusting for beta, these are much lower. “Our managers tend to own low beta stocks on the long side and high beta stocks on the short side. We aim to be neutral to equities, credit spreads and rates,” says Nguyen. The one clear factor exposure however is a deliberate long volatility bias, with two of the ten managers having an explicitly long volatility approach, which will often be negatively correlated to equities.
Leverage can be defined and measured in different ways, and prime broker lending can be riskier than margin or futures. “Nonetheless, FERI aims for “low leverage” and does not invest in arbitrage strategies using 20-30 times leverage, which may have good track records but also entail big left tail risks,” says Maier. “It is very important for us to have a conservatively managed product, which increases diversification and adds stability in our asset management mandates,” adds Herzl.
It is also important to take enough risk to make an adequate return. Some UCITS hedge funds with very low management fees and no performance fees may target only cash plus 1% with volatility of 1-2%. The BTV AM Alternative Investments Fund is not focused on these sorts of funds. It is in funds targeting medium to high levels of returns and risk relative to the UCITS universe, but low to medium returns and risk within the wider hedge fund universe, where average levels of volatility are higher. Managers are also incentivised to perform: some eight out of ten funds in the BTV product have a performance fee. FERI has in many cases been successful at using its reputation, relationships and size to negotiate fee rebates or reduced fees.
Some hedge fund strategies have very high cash weights up to 100% but that is not the case for this product. “The cash weighting at underlying fund and fund of funds levels adds up to a single digit percentage number and is currently earning money market rate,” says Maier. There are share classes with and without hedging from USD to Euro.
At the manager level, value-added from security selection, macro views, tactical trading prowess and expertise in corporate events, as well as some insurance and volatility-related risk premiums, should be amongst the main return drivers.
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