10-Year Retrospective: ASG Global Alternatives Fund

By David E. Kuenzi, CFA®

On September 30, 2018, ASG Global Alternatives Fund celebrated the tenth anniversary of its launch. Senior Research Scientist and Portfolio Manager, David Kuenzi, takes a look back at the history of the Fund and the firm.

Global Alts10 Year Anniversary Timeline3

How did AlphaSimplex get its start?
AlphaSimplex was founded in 1999 by Dr. Andrew Lo, an authority on algorithmic investing, risk management, and behavioral finance. For the first few years, AlphaSimplex worked with large financial institutions and hedge funds to develop investment models and trading technologies. In 2003, the firm launched its first fund, a multi-strategy quantitative global macro hedge fund. Like our current strategies, this fund was designed to adapt to evolving global markets.

All of AlphaSimplex’s strategies are based on Dr. Lo’s Adaptive Markets Hypothesis, a theory of market behavior that recognizes that financial markets are highly competitive and adaptive, and not always efficient. As a result, market conditions are ever-changing, and market volatility1, risk premia2, and cross-asset correlations are not static. The implication is that investment strategies must continuously adapt as markets evolve in order to deliver more consistent performance.

How was ASG Global Alternatives Fund developed?
In 2007, Dr. Lo and another AlphaSimplex researcher published an academic paper suggesting that the exposures and strategies used by hedge funds could be replicated algorithmically using liquid instruments, at a lower cost, and with greater transparency. Over the next year, researchers at AlphaSimplex built on that concept and began to develop the fundamentals of the ASG Global Alternatives Fund.

The Fund was originally designed to provide diversification benefits similar to a fund of hedge funds, especially for retail investors who could not otherwise access hedge funds because of minimum-investment requirements.

What does the Fund aim to do?
The Fund pursues an absolute return strategy that seeks to provide capital appreciation consistent with the risk/return characteristics of a diversified portfolio of hedge funds. In other words, the Fund tries to provide investors the same kind of risk and return they would get if they could invest in a fund of different hedge fund strategies.

What is the Fund’s strategy?
The strategy combines two approaches to hedge fund returns. The core is a factor consensus model, which is designed to capture the broad exposure of hedge funds to a universe of liquid factors, such as the returns of stocks or bonds. This core attempts to capture what hedge funds are investing in. The satellite of the portfolio is a selection of alternative risk premia strategies that seek to emulate how hedge funds are investing.

How does the factor consensus model work?
The factor-based portion of the portfolio uses a series of highly sophisticated algorithms to estimate the exposure of hedge funds to the broad asset classes. The algorithms look at data from over 4,000 hedge funds derived from a number of industry databases. This component of the portfolio is designed to provide investors with the key beta and alternative beta exposures taken on by hedge funds. It is currently around 70% of the strategy’s risk budget.

How do the risk premia models work?
Our bond carry3 strategy is a good example. We hold long positions4 in global government bond markets where gains are more likely and short positions5 in bonds where losses are more likely, based on the current characteristics of the yield curve6 in each market. It simply tries to capture a carry opportunity in the marketplace.

In general, we are not looking for “big trades,” as these involve very large win or lose outcomes. Rather, we want to combine a variety of small, focused trades in such a way that it provides for a strong, diversifying return stream over time. We recognize that not all strategies work all of the time, but if we can identify many strategies that work over time, we believe we can create a well-diversified portfolio for Fund investors.

What is the research process for the ASG Global Alternatives Fund?
The key research question is, “Where are hedge fund returns coming from, and how do we obtain those returns in a thoughtful and automated fashion?” The research process is focused on rigorous thinking and economic intuition. There are really three steps: idea research, modeling and feedback, and portfolio implementation. Idea research relates to a particular source of hedge-fund- like returns. The team reads academic papers, talks to industry contacts, develops economic intuitions, and creates a thesis statement. Then the strategy moves into modeling and feedback. The researcher puts the data into computer code, generates simulated results, and then obtains feedback from other researchers and the AlphaSimplex Investment Committee. Depending on the nature of the feedback, this process may repeat itself several times. Finally, the research is implemented within the portfolio. The team makes portfolio sizing decisions and works through portfolio implementation details. The entire process is designed to be both efficient and thorough.

How can the fund fit into an investor’s portfolio?
Financial professionals can generally use the fund in one of two ways:

  • A hedge fund replacement (especially for a fund of funds or a multi-strategy fund)
  • A core holding in an alternatives portfolio that uses a core/satellite approach.

We believe ASG Global Alternatives Fund offers a way to access what effectively functions as diversified hedge fund exposure, but with the liquidity, transparency, and lower fees of a mutual fund.

  1. Volatility is a statistical measure of the dispersion of returns for a given security or market index.
  2. Risk premia refers to the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset.
  3. Carry/carry trade is a trading strategy based on differences in global interest rates and currency exchange rates.
  4. Long position refers to purchasing an asset with the expectation that it will rise in value.
  5. Short position refers to the sale of an asset with the expectation that the asset will fall in value.
  6. Yield curve is a curve that shows the relationship among bond yields across the maturity spectrum.

AlphaSimplex Group, LLC is an investment management firm that specializes in researching and analyzing market behaviors and risk.

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Risks: Leverage can increase market exposure and magnify investment risk. Futures and forward contracts, like other derivatives, can involve a high degree of risk and may result in unlimited losses. Because they depend on the performance of an underlying asset, they can be highly volatile and are subject to market, credit, and counterparty risks. Short exposures using derivatives may present various risks. If the value of the asset, asset class or index on which the Fund holds short investment exposure increases, the Fund will incur a loss. The potential risk of loss from a short exposure is theoretically unlimited, and there can be no assurance that securities necessary to cover a short position will be available for purchase. Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets. Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss. Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund’s investments to decline. Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors. Concentrated investments in a particular region, sector, or industry may be more vulnerable to adverse changes in that industry or the market as a whole. Diversification does not guarantee a profit or protect against a loss.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions and are as of September 2018. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus on our website containing this and other information. Read it carefully.

CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.

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