European Fund of Hedge Funds Awards 2016
Since opening its doors in 2000, Abbey Capital has distinguished itself as a key player in the managed futures industry, pioneering the use of segregated accounts in a fund of funds format.
Based in Dublin, Abbey combined managed accounts and technology to build a proprietary risk management system long before transparency, liquidity and look-through became common demands by institutional investors.
The flagship ACL Alternative Fund is a commingled fund allocating to 22 managers through managed accounts. There is a high level of segregation at the managed account level, with the fund offering different currency and institutional share classes, depending on the minimum investment required.
The fund combines a core allocation to trend following, with satellite allocations to non-trend-following strategies. Commodity trading advisers (CTAs) are appointed to trade on behalf of the fund through the managed accounts held at brokers.
Trend-following strategies are given the largest allocations with 50–60% of risk, with the remainder in non-trend-following strategies.
Non-trend-following strategies include global macro, short-term systematic, counter-trend and value. These CTAs generally have a correlation of less than 0.3 with the trend-following group.
The trend-following strategy allocation cannot deviate outside of the 50–60% range. The allocations to the satellite, non-trend-following strategies can fluctuate but the sum of the allocation to non-trend-following strategies is maintained between 40% and 50%.
When a CTA is selected for the portfolio, an assessment is made according to what percentage of the CTA's trading can be attributed to each of the trading styles in the fund. For example, a diversified trend-following CTA may have a 70% allocation to trend-following strategies, 20% to value strategies and 10% to counter-trend strategies. The percentage of overall portfolio risk produces the aggregate strategy mix for the portfolio.
These allocations are aggregated by the CTA and weighted according to its percentage of overall portfolio risk to produce the aggregate strategy mix for the portfolio.
"This fund gives investors access to absolute return strategies with a 16-year track record, a blend of trend and non-trend and a high level of liquidity and transparency," explains Mick Swift, deputy CEO and research director at Abbey.
"One of the features of CTA managers is the high degree of dispersion. The challenge for investors is to pick winners. Many may be disappointed if the CTA they pick does not perform. A multi-manager format addresses this. We cover the full spectrum of managers and, over the medium to long term, capture value. The structure is very transparent and liquid and we do it in a cost-efficient manner," he adds.
The philosophy, according to Swift, is deceptively simple. A multi-manager approach effectively gives investors access to CTAs without having to worry about picking the right CTA mix. With annualised returns over the 16-year period of just under 9%, the format clearly works.
Abbey Capital's core investment philosophy is to deliver investment products that generate absolute returns using managed futures, foreign exchange and global macro investments in a multi-manager fund structure with meaningful risk overlay and ongoing manager due diligence.
The challenge for investors is to pick winners. Many may be disappointed if the CTA they pick does not perform
Swift says the firm's success is based on investment in people and infrastructure, as well as its approach to risk management and research. This combination has helped to build a robust track record.
Like many of the big CTA shops, Abbey Capital has invested heavily in research, technology and innovation over the years, developing proprietary systems that assist in quantitative analysis and risk management of its portfolios.
"We fundamentally believe trend following is a robust strategy," says Swift. "Trends persist in all financial markets. Trends are a feature of life and financial markets, and we feel you have to have significant allocation to trend to capture its benefits," he adds.
But this strategy, like others, will have periods of drawdowns. When these will occur is not something that can be predicted.
"We are investing for the long term and to capture returns. We don't want any concentration risk and we don't want any one manager to dominate. So the fund is very diversified," Swift continues.
Being diversified in trading markets, sectors and styles across managers, Abbey is able to capture market risk. "The challenge of a CTA is that it is in the market at all times, looking for opportunities. It's about time in the market, not timing of the market," Swift states.
The maximum risk allocation to any one CTA is capped at 15% while new CTAs start trading with allocations of approximately 1% of portfolio risk.
Selection and rating
As part of the investment and portfolio management process, the investment committee – comprising Swift, CEO and chief investment officer Tony Gannon, chief operating officer Andrew Meleady, head of research John Twomey and managing director Alan Dunne – assigns a rating of between one and five to each selected CTA. These ratings determine each CTA's target risk allocation within the fund portfolio.
The fund aims to generate absolute returns with a realised overall volatility of approximately 12.5%. It allocates on the basis of volatility and adjusts all CTAs to the same level of volatility to compare performance and to make allocations.
Funds are allocated to each CTA to achieve a 21% volatility target and to do this Abbey may gear up the notional allocations to CTAs if the manager runs its own program at less than 21% annualised volatility.
For example, if the ACL Alternative Fund wanted to allocate $100 million to a CTA at 21% annualised volatility but the underlying CTA ran its program at 7% annualised volatility, Abbey would ask the CTA to trade a notional account size of $300 million.
A wide range of factors is considered for the ratings, encompassing quantitative and qualitative elements. Performance is one of them, but not the driving force. The aim is to provide additional structure around the allocation and portfolio management process, rather than to create a systematic process. The investment committee can alter the ratings at any time and is not bound by the ratings when it comes to allocation decisions.
Typically CTAs can be above and below the risk allocation implied by their rating on a daily basis.
"Margin is a key risk measure and margin to equity is a hard limit for all managers. Breach that, and we terminate the manager. That's actually never happened yet," explains Swift.
He believes the reason why no manager has ever been deselected is that CTAs are experienced in running their business. "They have a lot of skin in the game themselves and are very professional," he adds.
We find with pension funds it can take more time to secure the investment but from our conversations in the field, we find many are well up the curve on understanding the strategy, helped in this by consultants
ACL runs about $2.5 billion while Abbey Capital, across all its product lines, has around $6 billion of assets under management. Over the last 12 to 18 months, Abbey has experienced inflow into its funds. It runs a private placement fund, as well as a '40 Act fund in the US plus other mandates.
"A lot of investors are rebalancing or repositioning as the equity market rally continues. They are seeking to diversify in a period of great uncertainty," says Swift in response to this inflow.
"Equity was off in January and February  and CTAs did well. Managed futures in general had a strong performance in June. But there is potential for more shocks, like Brexit and the US presidential election. While overall performance may be sluggish, the strong flows are due to investors looking forward."
It is clear more institutional investors are easier about investing in CTAs/managed futures. "Over the years, there's been a huge amount of education and explaining of the strategy and what it does. It's always been transparent but the perception of the black box and algorithms clouded that," notes Swift.
"Over the last couple of years we've certainly seen some very professional houses like Aspect, Winton, AHL, change that perception. I definitely think among the larger institutional investors there is strong appetite. We are giving investors diversification, liquidity and real returns over time," Swift adds.
Globally there is interest from pension funds. "Pension funds are looking for alternatives and ways of rebalancing equity holdings for the longer term. We find with pension funds it can take more time to secure the investment but from our conversations in the field, we find many are well up the curve on understanding the strategy, helped in this by consultants."
The future for Abbey, says Swift, will be much the same. "We're sticking to our specialisation and our conviction. We're getting the message out that a multi-manager approach is an effective way to capture the benefits of CTAs/managed futures. We'll stick to our knitting and continue to work with some of the finest managers out there. The future is always uncertain – more so than ever – but at this juncture with stocks rallying strongly for some time, interest rates incredibly low, where the next move will come from is anyone's guess. Trends will come back. That's the fundamental part of our philosophy."
Abbey Capital's ACL Alternative Fund also won best niche FoHF and best investor relations team award.
The week on Risk.net, September 8-14, 2018Receive this by email