The reality is that these strategies are cyclical. Rather than viewing them as all-weather portfolio fixtures, Fraynt says, “They should be seen as tools. For instance, gold may hedge against inflation, equities is a bet on growth, and sovereign bonds may offer income with lower risk of default. The same conditionality applies to the risk premia strategies. Carry provides synthetic income, but in practice tends to be correlated to equities and experience significant drawdowns as we saw in 2020. Trend strategies can profit from up or down trends but struggle during trendless periods or reversals. Value strategies are usually painful until periods such as 2022 or early 2025 when they contribute significantly”.

Autopilot or active and dynamic?

Running ARP on an “autopilot” mentality with static models and fixed weights can therefore lead to drawdowns and correlate with the equity market, something that would detract from the value of adding such vehicles to a diversified portfolio. As of late 2022 bfinance noticed that 29% of ARP funds previously around in January 2020 had shut down, this also created behavioural problems for the timing of investor allocations for those that stayed open.

“Clients who do not fully understand the strategy dynamics may redeem at the wrong time, particularly during an equity drawdown,” Fraynt points out. This is not such an unusual phenomenon: the money-weighted rate of return on most funds is well below the time-weighted return. It’s a phenomenon known as the ‘behaviour gap’ in behavioural economics.

Athena’s portfolio construction intentionally balances structural and tactical elements. There is a hard-wired presence of defensiveness, which is designed to help the portfolio outperform when equities decline. Meanwhile, short-term tactical strategies are intended to offset defensiveness elsewhere and assist in capturing positive returns when equities appreciate. In addition, infrequent discretionary trades allow for a swift and flexible repositioning of the portfolio in anticipation of a regime change. Over time, these trades have materially aided portfolio performance.

Decorrelated and different cycles

Most strategies including risk premia are cyclical, but the key benefit is that risk premia broadly tends to follow different cycles from the cyclicality embedded in equities or bonds, which tend to dominate traditional portfolios.

Since US equities started their recent decline in 2025, the fund has been generating attractive positive returns. By March 19, 2025, Athena gained around 5.3% YTD versus equities down about 3.2% for the same period².  Since inception, Athena’s negative correlation to the S&P 500 remained around -38%, and to the NASDAQ near -48%, while the correlation to Bloomberg Global Agg has been between -32%³. This data is based on weekly returns. Since daily NAVs are published on Bloomberg, Morningstar and elsewhere, these results are readily available to investors.

In contrast to many other defensive strategies, which at times are branded as “tail risk” or “long volatility”, Athena has also generated attractive returns when the S&P 500 rallied. The strategy has made its highest returns during bear phases for equities, but still preserved capital and delivered strong results in bull runs. In 2024, when the S&P 500 was up 25%, Athena was up about 9%, with only a quarter of the volatility. In 2023, it also saw slightly positive returns but in 2022, when the S&P dropped 18%, the Fund had a YTD return of around 10%. Athena’s negative correlation to bonds has been maintained – even though it has sometimes been long duration⁴.

Building blocks

Portfolio construction starts from the bottom up by identifying a persistent anomaly that is uncorrelated to equities or bonds. “If liquidity and the costs of extracting the premium are deemed acceptable, we then determine whether and where it fits into the portfolio,” says Fraynt. There is an orthogonality hurdle that these strategies must pass. Once these criteria are satisfied, ongoing monitoring is designed to ensure each strategy remains defensive, each position is well understood and can be discretionarily adjusted. The same five broad premia – value, defensive, carry, trend and flows – have been traded since the Fund was launched. “Over time we’ve modified some of the strategies and revamped others, but the core philosophy remained the same since inception of the Cayman fund in 2019,” says Fraynt.

Over time the proprietary portion of strategies in the portfolio has increased and will likely continue to grow. “Academic strategies are well-known, persistent and reliable, but are harder to improve upon. We are searching for sources of returns beyond generic carry, value and momentum, which have low Sharpe ratios. Proprietary strategies tap into potential returns that are not well-known academically,” says Fraynt.

Occasional discretion

Dynamic rebalancing of the premia over different timeframes can add some value. Some strategies take months to rebalance while others may take less than a week – and discretionary decisions can react even faster.

Fraynt’s 25 years of experience in alternatives in several sell-side and buy-side roles is brought to bear not only in the evolving research process but also in occasional discretionary intervention, which typically occurs two or three times a year. Discretionary decisions can react much faster than the multi-day, multi-week and multi-month timeframes for systematic rebalancing of strategy weights.

Position level discretion

For instance, in early September 2024, trend strategies were positioned to benefit from dollar depreciation based on fears of a slowing US economy. “Athena’s trend strategy was short the dollar. But a turning point occurred when the Fed surprised investors with a jumbo 0.5% rate cut, raising animal spirits and catalysing economic reacceleration, increasing the odds of a forced short covering among similar strategies in the market. This prompted us to exercise discretion, cutting and reversing from a short to long dollar stance. The move helped the Fund avoid losses on the short dollar position and instead generated profits. Our capacity to make discretionary changes to the portfolio resulted in repositioning that otherwise could have taken weeks for systematic models to complete,” says Fraynt.

Premia level discretion

Somewhat similarly in 2022 Athena reduced the trend weighting in October, when it became clear that the Fed would pause raising rates and simultaneously the ECB was becoming more hawkish.

Portfolio level discretion

Discretion can also be applied at the overall portfolio level to increase or reduce risk exposure levels. In late 2024 Fraynt judged that, “Equity valuation dispersion had reached extreme levels and currency markets were also heavily dislocated with USD appreciation and JPY depreciation continuing even after we had taken some profits on long USD in October. We thought that the Republican sweep had made investors over-optimistic about US economic re-acceleration, since election promises including tax cuts and deregulation would be harder to implement on January 20th than many have anticipated. Therefore, exposure across all strategies was discretionarily increased in January 2025, that decision paid off handsomely in February and early March”.

Variable volatility

The strategy does not target a fixed level of volatility. Realized volatility is a function of position sizing and market volatility. “Volatility is not targeted because for a defensively positioned fund like ours, reducing risk after a sell-off would be counterproductive. Volatility often presents opportunities for the Fund to perform better when equities sell off,” points out Fraynt.

One reason why Athena’s volatility has stayed in single digits is that correlations between Athena’s strategies tend to remain low. Fraynt admits that correlation patterns can break down during liquidity crises. However, for a defensive fund these are often opportunities to monetize, not to derisk.

Incidentally, the increased intraday volatility seen in March 2025 with equities sometimes reversing direction in the afternoon has not had a significant impact on the Fund, since it does not trade over intraday timeframes. “It’s a noisy environment, and we don’t overreact to such fluctuations. We don’t trade based on short-term volatility. Our portfolios are designed to have minimal impact from these fluctuations. We tend to perform better in higher volatility over time, though it depends on market behaviour. While our “hit ratio” has been 55% over time, we expect to benefit from volatility more often than not. Speculative rallies can be painful, but we don’t react to the noise – they’re necessary headwinds that we accept to benefit from in the long run,” says Fraynt⁵.

High hit rates

Low correlations between the strategies help to improve the hit rate. The hit rate – or proportion of profitable periods – has been 59% using weekly data, and 55% using daily data, for the overall Fund. Given some degree of asymmetry in the return profile, this is an excellent hit rate⁶.

Transparency

Opacity and black boxes are common concerns about some quantitative strategies, including some unsupervised machine learning and AI approaches, but Fraynt finds that all his portfolio positions can easily be explained. “Whether it’s because a security is undervalued, has momentum, or there’s money flowing into it, we can explain every position. It’s the opposite of a black box. We prioritize transparency. We believe clients feel more comfortable knowing exactly why a position is in the Fund.” Near full transparency in quarterly reports is provided to clients with some degree of time lag, and the monthly newsletters also provide colour on top of daily performance data. Though the firm does run customised managed accounts, no external clients have access to real time portfolio transparency.

Important Legal Information
_{The information provided does not constitute or form part of an offer for shares or an invitation to apply for shares. Subscriptions to shares of Franklin K2 Athena Uncorrelated Strategies UCITS Fund (the “Fund”) can only be made on the basis of the current prospectus and where available, the relevant Key Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter. An investment in the Fund entails risks which are described in the Fund’s prospectus and where available, in the relevant Key Information Document. No shares of the Fund may be directly or indirectly offered or sold to residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton representative before making any plans to invest. Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and is provided to you only incidentally. References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time.}

_{Please consult your financial advisor before deciding to invest. The annual report, the prospectus of the Fund, and if available for this product the Key Information Document can be obtained from Franklin Templeton International Services S.à r.l., a Professional of the Financial Sector under the supervision of the Commission de Surveillance du Secteur Financier -8A, rue Albert Borschette, L-1246 Luxembourg – Tel: (352) 46 66 67-1 – Fax (352) 46 66 76 or on our website.}

_{The Fund’s documents are available in English and German at www.ftidocuments.com or can be requested via FT’s European Facilities Service available at www.eifs.lu/franklintempleton. In addition, a Summary of Investor Rights is available from franklintempleton.lu. The summary is available in English. The Fund is notified for marketing in multiple EU Member States under the UCITS Directive. The Fund can terminate such notifications for any share class and/or sub-fund at any time by using the process contained in Article 93a of the UCITS Directive.}

_{This material is intended to be of general interest only and should not be construed as investment advice, and it does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the Fund.}

_{Franklin Templeton (“FT”) provides no guarantee or assurance that the Fund’s investment objective will be attained. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Past performance does not predict future returns. Currency fluctuations may cause the value of a Fund’s investments to diminish or increase.}