With the swing towards customisation expected to gather momentum in 2018, flexiblity and responsiveness to clients’ needs are increasingly important. Deutsche Bank is well positioned to assist its clients, improving their agility and flexibility with the use of dedicated vehicles offering the best possible service
The trend to watch in 2018 is customisation, according to Deutsche Bank’s head of multi‑asset products, Manos Chatiras. He identifies three ‘waves’ that have impacted the Deutsche Bank Liquid Alternatives Platform since the financial crisis began. The first, which occurred in 2008–2009, was a drive from investors around governance, transparency and liquidity. The regulatory wave hit the platform from 2011 onwards, when Ucits in Europe and 40 Act mutual funds in the US ‘democratised’ liquid alternatives for investors that previously had little access to alternative strategies.
These two trends have now taken a backseat as wave three, customisation, sweeps all before it.
“A lot of our investors are interested in customised strategies – not just in business or fee terms, but in defining investment strategies. Investors have become more active in how they want hedge fund exposure. They want to have more say in what investment managers are focused on.
“As they have become more sophisticated, they want to add value to the hedge fund manager. There is more co‑operation between investors and managers. Our role is to help bring them together in the best possible vehicle dedicated to them,” explains Chatiras.
That vehicle is the Deutsche Bank platform, the equivalent of the proverbial sweetshop. It is one of the largest and most comprehensive investment platforms, offering alternative strategies in a variety of formats that address investor requirements.
The platform is arranged into three sub‑platforms: DB Platinum, for Ucits funds; dbalternatives, for alternative investment funds (AIFs); and dbSelect, for unfunded managed accounts.
DB Platinum currently offers relative value credit, equity hedge, managed futures and equity market‑neutral strategies in a Ucits fund with daily or weekly liquidity, while dbalternatives gives investors access to a complete range of alternative strategies through the more flexible Alternative Investment Fund Managers Directive (AIFMD). dbSelect offers unfunded managed accounts for margin-based strategies with currently more than 90 accounts in strategies such as managed futures, global macro, commodities, risk premia and foreign exchange. The platform gives investors the option of unfunded or partially funded access, principal protection and option payouts among others.
The overall platform’s success is unquest-ioned – over the past 14 years, more than 400 hedge fund strategies have been launched into managed accounts, ranging from some of the biggest names in the industry to managers just starting out.
dbSelect is a series of managed accounts structured as cells, each dedicated to an investment strategy of a hedge fund manager. The cells do not have a typical fund structure, but offer the ability to invest in derivatives instruments with minimal margin requirements. As these cells are unfunded, Deutsche Bank is the sole investor in each cell and posts the margin on its behalf. This provides investors with access to the strategies through products such as unfunded total return swaps, allowing them to take advantage of cash‑efficient benefits.
For example, in a total return-swap arrangement, an investor would put up $30 to Deutsche Bank for a $100 exposure. The investor receives $30 plus index performance at maturity, subject to a minimum of zero. The swap is non-recourse, so cannot be negative.
Increasing demand for customisation
Through these various structures, investors are beginning to move into customisation. Chatiras explains: “For example, an investor looking at a specific hedge fund strategy such as equity long/short or event‑driven will identify a particular area in the strategy or sub-strategy where he thinks the manager has a particular skill or alpha. We create a vehicle to extract that specific idea.”
An example of a variation of this idea comes in the form of Deutsche Bank teaming with Man AHL to launch a Ucits-compliant liquid alternatives strategy – the DB Platinum IV Man AHL Equity Alpha fund. It employs Man AHL’s systematic equity market-neutral strategy, AHL Equity Alpha, combining single-stock market-neutral factors with sector and factor timing techniques to identify arbitrage opportunities.
“We decided to extract the sub-strategy as a standalone, working with the manager as if we were the investor,” says Chatiras. “Offering such unique strategies is another way we’ve added value to our investor base.”
Together with the customisation trend, Chatiras also points to the “second generation of multi‑manager commingled vehicles” that are cropping up. “Over the past 12 months or so, investors have become more competitive, pushing the boundaries in search of alpha in a low‑volatility environment.”
Investors are looking for a new vehicle as the fund of fund model has been challenged. “As an example, investors are coming to us to see if we can help them create a multi-adviser Ucits fund. This is a commingled vehicle that – unlike the traditional fund of Ucits funds model – allows for more flexibility on the underlying strategies while eliminating the double layer of fees. We have been able to put this multi-manager, multi‑strategy fund into a Ucits format. That’s a big trend and we’re working with a number of clients to develop that capability,” says Chatiras.
While Ucits continues to gain investors, the AIF vehicle under the AIFMD rules is still seeing some resistance. However, Chatiras believes investors are slowly becoming more acquainted with the flexibility AIFs offer. He expects that in four or five years there will be a clear line between the very liquid strategies offered in Ucits and the less liquid and more complex strategies that fit into AIFs. “AIFs were built for that purpose – they can hold different levels of liquidity and do not have the investment restrictions associated with Ucits,” he says.
“We are seeing light at the end of the tunnel of the bifurcation of liquid and more complex and illiquid strategies between Ucits and AIFs,” he adds.
Tailoring offerings to investors’ needs
As customisation comes into its own over the next couple of years, he also expects to see more investor interest in complex strategies and those just beginning to be offered, such as micro-caps, loans and direct lending. “This is an area where we are pushing forward without losing focus on what works today,” Chatiras says. “In today’s environment, if you want to be a successful managed account, you have to be flexible, nimble and able to listen to what clients need – and deliver solutions. As a solutions‑driven business, we’re able to offer investors that flexibility in the vehicles they want.”
Deutsche Bank is not focusing on just one type of wrapper for strategies and believes investment platforms of the future will need to offer a wide range of options if they want to attract and retain investors. Deutsche Bank is seeing investors utilise all platforms, with Ucits used for distribution access, AIF for customisation and the managed accounts for a combination of factors. “You need the full suite of capabilities to stay competitive and current,” reiterates Chatiras. “At the same time it’s important to be innovative and bring new products to market.”
In this area, Deutsche Bank has another idea it is expanding – alternative risk premia into Ucits formats. Chatiras sees some of the most sophisticated hedge funds launching their own versions of alternative risk premia products, either in a Ucits or AIF wrapper, although most are Ucits.
“We expect to launch our first active risk premia product in a Ucits format in 2018,” says Chatiras. “We intend to build a whole suite in active alternative risk premia next to our hedge funds. These products are actively managed by alternative fund managers. We expect to launch our first passive single‑strategy risk premia Ucits based on Deutsche Bank’s quantitative investment solutions expertise and continue to build up the offering throughout 2018.”
Another new strategy Deutsche Bank is pushing is risk mitigation – one of the best-known risk mitigating strategies is commodity trading adviser/managed futures.
“We are in a very fortunate position to possess daily historical data on hundreds of managed futures and alternative risk premia strategies on our dbSelect platform that allows us to test their risk mitigating qualities in different market stress scenarios. Does it perform if volatility spikes or in a market selloff? Does it produce flat or positive performance over normal markets? Is it convex enough at the time of an event? If the answer to these questions is yes, then the next step is how we can best combine these strategies to maximise their risk mitigation qualities. We’ve been working with clients to do this. This is a focus for us into 2018,” explains Chatiras.
The importance he places on this is a reflection of the shift in market dynamics expected to start in 2018 as quantitative easing lessens, interest rates begin to rise and markets become more volatile. Investors are already thinking about defensive positions for their portfolios, and Deutsche Bank wants to bring some ideas to the mix.
“The breadth and depth of the platform spans a variety of medium- to long-term as well as short-term managed futures strategies. As these strategies are uncorrelated to each other and the equity markets, it makes a lot of sense to bring them together as a risk mitigation idea or solution,” Chatiras says.
“Another competitive edge we bring to the table is our ability to offer these strategies as a true overlay – for example, there is no need for investors to deploy cash or disrupt their existing asset allocation,” Chatiras says. He also believes this offering caters “very nicely” to different investor types and allows emerging and developed managers to showcase their performance.
While 2017 saw a shift to more work with big institutional investors as it relates to the platform, Chatiras expects 2018 to shift more into customisation while also designing risk mitigating solutions. Alongside this is a slowly emerging trend Chatiras is seeing in discussions with investors who need the necessary transparency to calculate not just Solvency II requirements but also environmental, social and governance (ESG) parameters.
“We are working with a number of prominent investors at the forefront of ESG to help them satisfy their reporting standards in this area and their investment guidelines. While the investor base for this is still small, it is growing and we need to be cognisant of this trend.”
Moving into 2018, Chatiras expects growth through the platform of around 20%. “As assets under management (AUM) flows come back into the hedge fund industry as a whole, liquid alternatives will benefit. We are on the back of a decent year for alternatives on an absolute and relative basis. The macroeconomic environment is one that means more institutional investors will be focusing their efforts on increasing the share of alternatives in their portfolio.
“We believe 2018 will be a strong year in terms of performance and AUM flows for the industry. We should be in a strong position to capitalise on this through our platform and offering.”