Institutional investment product of the year: Deutsche Bank

Risk Awards 2018: €829m alternative premia fund shows softening bank-asset manager rivalry

Tarun Nagpal

Photo: Geraint Roberts

In a deal that shows how banks and asset managers have gone from competitors to collaborators, Deutsche Bank launched its largest risk premia Ucits fund this year.

The €829 million BetaMiner I fund has been crafted to provide risk premia exposure to a sole investor – a European asset manager looking to allocate to alternative premia from its range of multi-asset funds. The client requested anonymity.

The asset manager ran a request-for-proposal last year looking for ways to access alternative risk premia with close to zero correlation to the equity and bond markets and a target volatility of around 6–8%.  

In the past, asset managers turned to hedge funds for their liquid alternatives allocations, but lack of performance combined with fees and the “opaqueness of the hedge fund industry” is causing clients to consider other options, says Tarun Nagpal, global head of Deutsche Bank’s investment solutions business.

The client could not gain exposure to risk premia using more conventional total return swaps because its funds are not set up to trade derivatives, so Deutsche Bank proposed a Ucits wrapper instead.

The bank has sought to carve a niche for itself developing bespoke portfolios of systematic, alternative risk premia strategies tailored to customers’ individual investment objectives. It says it has completed more than 60 such bespoke deals, which seek to provide uncorrelated return streams.

“This was probably the most intensive due diligence process we’ve been through as a business,” says Sean Flanagan, head of the quantitative investment solutions team.

Deutsche launched the fund in early 2017, with Assenagon Asset Management acting as fund manager and FundRock Management Company as the fund platform.

If you rewound to 2011, when we met with asset managers, hedge funds and quant managers, the reaction was to view us as some form of competition

Sean Flanagan, Deutsche Bank

The fund invests in local government bonds and cash, and enters into an unfunded swap with Deutsche Bank referencing an underlying portfolio of alternative risk premia investment strategies to provide the required premia exposures.

Translating a swap into a Ucits fund requires close monitoring and reporting, to ensure the underlying exposures comply with diversification and value-at-risk limits required by Ucits rules.

Despite the challenges, Ucits funds and other fund wrappers are the vehicle of choice for the majority of Deutsche Bank’s clients in risk premia.

Ucits funds are an “extremely transparent, very liquid and very well regulated vehicle … so increasingly in Europe, we’re seeing that large institutions looking at making a meaningful allocation into risk premia would like to do it in Ucits format,” Flanagan says.

In the early days of alternative risk premia, banks would typically pitch their products to investors as similar to those offered by asset managers but without the active fees. Deutsche Bank’s quantitative investment strategy group, though, is making a special effort to cater to the needs of asset managers.

The bank’s global investment solutions business, launched a year ago, operates along four product lines – quant solutions, multi-asset third-party products, multi-asset solutions and retail structured products. At the core of the business is its €20 billion risk premia offering.

You get access to similar sorts of trading strategies you would get from a hedge fund but at passive pricing, and the reason you’re able to do that is because the content is being provided by Deutsche Bank

Sean Flanagan, Deutsche Bank

Asset managers now represent the fastest-growing client base by number of trades within the business, as well as the largest category by assets.

“If you rewound to 2011, when we met with asset managers, hedge funds and quant managers, the reaction was to view us as some form of competition. To be honest, in the early days, some banks’ sales story was ‘why pay fees to managers when you can get something just as good from us but cheaper?’. In the past few years, asset managers have realised banks’ systematic strategies are actually tools they can use,” Flanagan says.

“You get access to similar sorts of trading strategies you would get from a hedge fund but at passive pricing, and the reason you’re able to do that is because the content is being provided by Deutsche Bank, which is the entity that’s making prime brokerage-type revenues on the underlying trades,” Flanagan adds.

In what he calls “synthetic prime brokerage”, in some instances the bank is working with asset managers where the asset manager simply wants its own systematic trading strategy delivered in a swap format, to boil down what may be hundreds of transactions into a single line item.

While the largest hedge-fund owned Ucits risk premia funds typically operate 1% management and 10% performance fees, Deutsche Bank’s is offering exposure for a total expense ratio below 30 basis points.

The group’s pioneering efforts to quickly and cheaply deliver risk premia investments and customise solutions are changing the relationship between banks and asset managers in the alternative risk premia space. And Deutsche expects more deals to follow.

“I think it’s something we’re going to be doing again and again over the coming years,” Nagpal says.