Irish equity specialist Bloxham says that multi-managers are showing interest in its Midas global absolute return fund due to the underperformance of other funds in the sector.
It says many absolute funds have yet to adapt to the way that market conditions have changed over the last couple of years.
The correlation between asset classes such as equities and bonds is high and accelerating further, according to Bloxham. It says this correlation, along with lower liquidity levels and higher volatility, is making it difficult for absolute return managers to carry out effective pairs trading.
Pairs trading is a market-neutral strategy involving two stocks, often in the same sector, which are usually correlated in terms of price. A pairs trade is made when one stock rises while the other falls. The manager shorts the outperforming stock and invests long in the underperforming stock, with the expectation is that the stock prices will meet again.
Bloxham says that as market conditions have changed, so has the relationship between stocks in the same sector, making it difficult to identify a suitable pair of stocks to trade.
Bloxham’s fund, which launches in October subject to regulatory approval, will use information generated by a computer model that identifies overbought and oversold stocks as well as long-term trends. Four fund managers will interpret the data to construct a portfolio of long and short positions. The fund will invest 30 to 100 per cent in cash, which Bloxham says will reduce volatility and produce more consistent returns.
Lead fund manager and director of investment strategy Kevin McConnell says: “Absolute return funds have not delivered. They have taken a lot of money but are not working as effectively as they have been.
“Feedback from multi-managers is that market conditions are very different now and they are asking questions about abso-lute return managers.
We are not saying we have all the answers but we are looking at weaknesses, at volatility and correlation.”