Commentary: Understanding systematic multistrategy

Systematic multistrategy funds exhibited profitable performance in 2018 during a year when most investment strategies, including multirisk premium strategies and traditional multistrategy hedge funds, posted losses.

For example, the Societe Generale Multi Alternative Risk Premia index, which tracks the performance of programs that aim to systematically capture a diversity of discrete premiums — including value, carry and momentum — across multiple asset classes, lost 4.7%, a significant decline considering its 3.7% annualized volatility.

Given market developments and recent volatility, it is an opportune time to consider some key features of systematic multistrategy funds. It is our view that SMS incorporates the most attractive features of traditional multistrategy and multirisk premium products, resulting in a performance profile that offers a compelling balance between stand-alone returns and diversification.

Although SMS funds share some elements of multirisk premium strategies and traditional multistrategy hedge funds, there are significant differences.

SMS strategies, for example, only invest in liquid assets (unlike multistrategy hedge funds that may, for example, invest in convertible bonds) but focus on absolute return instead of premium capture (unlike multirisk funds). They also include low-capacity markets and strategies, like short-term mean reversion and others.

Diversification across alpha strategies also characterizes SMS, with most portfolios including a balanced mix of synergistic investment styles. Trend-following is often a component, along with strategies such as multiasset carry, short-term mean reversion, volatility trading, fundamental value and various macro styles.

Managers in the systematic multistrategy segment may have roots in quant equity, futures and derivatives, macro or even traditional multistrategy hedge funds, but all SMS managers share a core belief in the value of the systematic process.

The development of the systematic multistrategy segment was a natural result of the enormous evolution in systematic trading that has occurred in the last few decades. Technological advances, increasing competition, and access to new, liquid types of securities (non-deliverable forwards, swaps, exotic commodities) are just a few of the drivers that have led quantitative researchers to expand their tool set, their reach and their vision. SMS managers have tackled this evolution with a step-change in research and development investment focused on creating more sophisticated empirical analysis, accessing more data with larger-scale simulations, and trading new markets and instruments, while incorporating machine learning techniques. As one might expect, this led to a rapid rise in the types and numbers of systematic investment styles.

This checklist outlines the key features of an SMS approach:

Futures contracts and foreign-exchange forwards tend to be the primary instruments traded, complemented by cash equities, options, interest-rate swaps and credit default swaps. An attractive feature is that nearly all instruments traded in SMS portfolios are centrally cleared, leading to very low counterparty risk.

Typically, trades are expressed through a combination of relative value and directional exposures (based on an investor's assessment of the price trend for a security or the broader market). A relative value trade could include cross-country (spread of German bund vs. U.S. Treasury note), term structure (U.S. two-year vs. 10-year rates), cross-asset within a sector (corn vs. wheat) and sector-neutral (Apple stock vs. a basket of tech stocks). As a rule, relative value exposures are neutralized to directional exposure.

Portfolios are managed with minimal discretionary input, using a rigorous research protocol to develop, validate and maintain investment models. Strategies may take either long or short positions, providing the potential to seek returns from both rising and falling markets. Performance tends to have little long-term correlation to traditional assets and many alternative investments.

The volatility-adjusted (10% annualized) cumulative performance of three indexes (in bold) and 11 SMS programs is shown.

On a volatility-adjusted basis, the difference in equity correlation between the SMS programs and the Barclay Multi Strategy index is visually very clear. It's also apparent that many SMS managers kept up with the SG Trend index during its surge in 2014.

Three things can be confirmed quantitatively from July 2014 to December 2018:

• Correlation of the Barclay Multi Strategy index to global equities was 78%.


• Average correlation of the SMS programs to global equities was zero.


• Average correlation of the SMS programs to the SG Trend index was 65%.

The last three years, of course, have been historically bad for trend-based strategies. But the performance chart shows that even in the period from July 2014 to March 2015, which was extremely strong for the trend index, nearly half of the SMS managers outperformed the index on a risk-adjusted basis.

The data shows that SMS portfolios deliver largely uncorrelated and attractive risk-adjusted performance in a wide range of market environments. Systematic multistrategy shares numerous similarities with multirisk premium strategies, but are differentiated by several features:

• Investment mandate: SMS has an absolute-return mandate while the goal of multirisk premium products is to efficiently capture risk premiums.


• Capacity: SMS portfolios will often include low-capacity markets, along with low-capacity investment styles like short-term trading and some relative value macro strategies. Such approaches are typically excluded from multirisk premium products due to the lack of scalability and resource requirements.


• Best ideas: SMS funds focus on best and most proprietary ideas, aiming for alpha capture. Multirisk premium products seek to maximize premiums capture.

We believe that there is a powerful rationale for SMS to be included in institutional portfolios. SMS portfolios provide attractive risk-adjusted performance with very little, if any, correlation to equity indexes. In our view, these highly liquid vehicles offer an attractive performance profile with a compelling balance between stand-alone returns and diversification.

Will Andrews is CEO of Campbell & Co., Baltimore. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.