If the Lehman crisis was a force nine earthquake on the Richter scale, the eurozone crisis is about half that, according to Bank of America Merrill Lynch global financial stress index. The rise of the emerging markets during the last 20 years and the build-up of credit, on the back of falling interest rates, has led to stresses which continue to be worked out.
We have not seen the end of the earthquakes until some new equilibrium is reached. Reinhart & Rogoff’s study (published in April 2008) of credit crises since England’s 14th century default suggests sovereign defaults reverberate for several years or even decades afterwards, with big moves in currencies and commodity prices. The control of the Chinese currency’s exchange rate to the US dollar is one example of an unresolved tension in the system.
What does this mean for multi-manager investing? The days of long-term performance being decided by how much of an equity bull a manager is, are over. Macro-economic events, political agendas and market and company fundamentals are all drivers and I expect this to continue.
Making money for multi-manager investors is now about finding diversified sources of alpha by allocating to a mix of strategies run by talented managers. For example, long-short equity funds do not have to rely on the direction of equity markets. They can have a low net market exposure and rely on relative returns between long and short stocks to make money. Event strategies rely on the manager anticipating the outcome of events such as mergers rather than the market going up or down. Systematic trading strategies use computer models to predict future price movements by analysing trends in prices of stock indices, interest rates, currencies and sometimes commodities. This also creates opportunities for tactical long-short trading in equities, fixed income, currencies and credit instruments.
This should be the perfect environment for multi-manager products, as all the skills to run such diverse strategies rarely reside in one investment house. The new generation of Ucits funds have the flexibility to implement many of these strategies but also change multi-manager skill sets, now requiring a background in hedge funds and non-traditional investment strategies to understand who is good at shorting stocks, how much risk managers are taking, whether they can measure it and even whether they have the right prime brokerage and pricing arrangements to deliver superior performance. That is very different from focusing on if someone is a good stockpicker.
Michiel Timmerman is managing director and chief investment officer at Ignis Advisors