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Reflecting on Scenario Setting: Absolute Returns Return Absolutely! PensionBridge Hedge Europe 2024

Unveiling the Pursuit of Consistent Gains Amid Cycle Easing, Changes in Regime for Inflation, Interest Rates, and Volatility

On February 7th, beneath the prestigious banner of PensionBridge Hedge Europe, we gathered at the Marriott Hotel in Zurich for a deep dive into the complex world of investment strategies, amidst an evolving economic backdrop. It was my privilege to moderate a panel titled

"Scenario Setting: Absolute Returns Return Absolutely", a platform for a comprehensive examination of methods for achieving consistent, positive outcomes in the face of market volatility."

Thank You to Our Esteemed Panelists

  • Sebastien Honniball, Investment Manager from Julius Baer

  • Patrick Oberhänsli, CEO of Evolids Finance LLC

Their unparalleled insights, expertise, and engaging discussions illuminated the complex world of absolute return strategies in investment, providing our audience with a wealth of knowledge and perspective.

Discussion Overview

In our engaging discussion, we navigated the critical aspects of absolute return investment strategies, underscoring their pivotal role in navigating today’s unpredictable market landscape. We delved into the essence of what absolute returns entail, highlighting their importance in securing positive investment outcomes independent of market fluctuations. Our panellists discussed the advantages and challenges inherent in a range of strategies geared towards absolute returns, including hedge funds, mutual funds, and derivatives. This comprehensive analysis sheds light on how these strategies can be effectively implemented for institutional and other portfolios, offering a nuanced perspective on their relevance and utility in different financial contexts.

The Essence of Our Dialogue

In an era dominated by the unpredictable swings of the market, the pursuit of stability and consistency in returns has become increasingly vital.

The Allure of Absolute Returns: Our discussion began with an in-depth examination of the allure versus the attainability of absolute returns. Both panellists concurred on the fundamental characteristic of these strategies: their independence from benchmarking against traditional market indexes.

  • Patrick Oberhänsli highlighted that Absolute Return Strategies are inherently designed to be positive, aligning closely with the concept of all-weather strategies, aimed at performing under any market conditions.

  • On the other hand, Sebastien Honniball introduced a critical perspective by focusing on the risk-to-return ratio, emphasizing that while the goal is to achieve gains over a specific period, these strategies do not universally guarantee positive outcomes. Sebastien further elaborated on the diversity in approaches within absolute return strategies.

Both panellists concluded that this divergence underscores the complexity and the need for a nuanced understanding of these strategies, highlighting that while they aim for consistent positive returns, the path and mechanisms to achieve this goal can vary significantly among managers and strategies.

Expert Navigation: As we ventured through the intricacies of securing absolute returns in the unpredictable currents of the market, our panellists highlighted the critical aspects of implementing and executing strategies aimed at absolute returns. They addressed the pivotal concerns surrounding investment horizons and the flexibility of these strategies across diverse risk profiles.

Unpacking the Discussion Topics

We continued our journey into the labyrinth of investment challenges, spotlighting the capricious nature of markets and the indispensable role diversification plays in forging stable, positive outcomes. This market dynamic lays the groundwork for the strategic deployment of absolute return strategies, unveiling a spectrum of challenges and opportunities for investors. Our dialogue navigated through:

  1. Impact of an Easing Cycle: Sebastien and Patrick offered their perspectives on what an easing cycle could mean for hedge fund allocations and performance. The consensus highlighted a likely increase in opportunities for hedge funds to capitalize on market movements and generate significant returns. Their analysis projected a landscape ripe with alpha-generation opportunities, urging investors to recalibrate their strategies to harness these emerging prospects.

  2. Strategic Prioritizations: Our discussion shed light on the proactive essence of Absolute Return investing, focusing on diverse methods for generating returns and managing risks. We outlined three principal strategies: the first prioritizes strategic asset combination selection, the second aims at generating returns from each investment, and the third combines these approaches. This framework equips investors to adeptly navigate market complexities, ensuring their portfolios are well-matched with their risk-return objectives.

  3. Derivative-Based Strategies: Our panel peeled back the layers on derivatives-based strategies, particularly exploring the intricate balance between risk and reward in utilizing derivatives to target absolute returns, succinctly outlining their strategic benefits for achieving investment success.

  4. Effects of Widening Credits: Our panel examined the implications of widening credit spreads on absolute return strategies, underlining the significant impact these conditions can have on strategy execution and success. The panellists advocated for a strategic approach that anticipates shifts in credit markets, ensuring that absolute return strategies remain resilient and effective in a fluctuating financial landscape.

Suitability for Pension Funds

As our panel continued exploring this topic, Sebastien Honniball highlighted the indispensable role of absolute return strategies for pension funds, driven by their critical need to meet future liabilities and their mandate to protect assets while fostering growth. This part of the discussion sheds light on the comprehensive advantages these strategies offer to pension funds, including:

  1. Enhanced Risk Mitigation: Highlighting the consensus from the panel, Patrick Oberhänsli suggested that in a landscape marked by uncertainty, the ability of absolute return strategies to deliver positive outcomes across various market conditions is invaluable for effectively shielding pension funds from the brunt of market volatility and downturns.

  2. Portfolio Diversification: The panel agreed that diversification is more than a buzzword; it's a critical strategy. Incorporating absolute return strategies diversifies investment portfolios, reducing overall risk by tapping into asset classes and techniques less correlated with the traditional markets, noted Honniball.

  3. Steady Returns: Addressing the necessity for consistent performance, the discussion veered into how absolute return strategies serve as a cornerstone for pension funds aiming to meet their liabilities amidst fluctuating markets.

In essence, absolute return strategies offer a nuanced approach to investment for pension funds, aligning with their core objectives of risk management, diversification, and the pursuit of steady returns.

Suitability for Long-Term, Low-Risk Investors

Our panellists shed light on why other types of investors with an eye on the long term and a low appetite for risk might find a safe harbour in absolute return strategies:

  1. Capital Preservation: Central to these strategies is the focus on safeguarding capital, an essential aspect for investors looking to protect their investments from significant losses, Oberhänsli stated, underlining the essence of these strategies for investors wary of significant losses.

  2. Stability: In a particularly engaging moment of our discussion, Honniball underscored with conviction, 'Striving for positive returns, come rain or shine, is far more than a mere goal—it's the bedrock of investment stability.

  3. Inflation Protection: Oberhänsli highlighted a vital benefit, suggesting, "Beyond stability, protecting against inflation ensures that the real value of returns is preserved, making these strategies a prudent choice for the long-term investor.

As the discussion unfolded, we learned from our panellists that absolute return strategies are not just a mechanism for risk mitigation but a comprehensive approach to achieving diversified, stable, and inflation-protected portfolios.

Key Takeaways and Strategic Insights

As our insightful discussion concluded, several critical takeaways emerged, underscoring the nuanced approach required for leveraging absolute returns in today's unpredictable market environment:

  1. Stay Informed and Agile: The importance of a deep understanding of the strategies employed cannot be overstated. Investors must be well-versed in both the potential risks and returns of their chosen strategies. Additionally, staying informed of global economic trends and shifts in central bank policies is essential for the timely adaptation of investment strategies.

  2. Champion Diversification: In the face of ever-changing market conditions, the role of diversification becomes paramount in the effective pursuit of absolute returns.

  3. Approach Derivatives with Prudence: Although derivatives-based strategies hold the promise of substantial returns, they demand a sophisticated grasp of market forces and a rigorous risk management framework. This cautionary stance is crucial in navigating the complexities inherent in derivatives markets.

  4. Monitoring Credit Market Trends: The success of absolute return strategies is heavily influenced by credit market conditions. To shield their investments from the adverse effects of rising interest rates, exploring alternatives is key. Strategies such as Long/Short credit allow investors to navigate through all phases of the credit cycle, can be used to meet specific return targets within a given timeframe and potentially outperform conventional benchmarks like inflation or the interest rates offered by savings accounts

These insights encapsulate the strategic depth and foresight necessary for navigating the volatile terrains of investment, particularly through the lens of absolute returns. By embracing these principles, investors can better position themselves to capitalize on opportunities while mitigating risks in a constantly fluctuating economic environment.

Closing Thoughts: navigating the Promise of Absolute Returns

Is " Absolute Returns Return Absolutely" right? This question set the stage for a discussion, leading to a nuanced yet hopeful "yes," underscored by the importance of knowledge, strategy, in investment.

We trust that the panel discussions at PensionBridge Europe 2024 in Zurich have provided a solid foundation for continued exploration into absolute return investments. Let’s keep the dialogue going, fostering a community of informed and strategic investors.

To everyone who joined us, your curiosity and engagement are what drive us toward excellence. May the takeaways from our session guide you through the complexities of the financial markets, towards informed and successful investment strategies.


NOTA BENE: A Sample of Academic Publications on Absolute Return Strategies

For those looking to dive deeper into the topic of absolute return strategies, the following academic publications offer valuable insights into this investment approach.

  1. "Absolute returns in wealth management: implementing risk-controlled strategies" by Francois-Serge Lhabitant, Denis Mirlesse, and Michel Chardon, discusses the practical steps to implement an absolute return strategy in equity markets. The paper focuses on the process of unbundling alpha from beta in the portfolio, optimizing the beta component, and applying dynamic risk budgeting techniques. This work, published in the Journal of Financial Transformation in April 2006, offers a detailed look into managing absolute return strategies within equity markets for wealth management (EDHEC Risk Institute).

  2. "A Review of the Differences between Traditional Investment Programs and Absolute-Return Strategies" by Hilary Till and Joseph Eagleeye, examines the fundamental distinctions between the hedge fund industry and traditional institutional fund management despite perceived convergences. Published in Quantitative Finance in 2003, this paper argues that the two industries remain distinct in essential ways, providing an analytical perspective on the evolving landscape of investment strategies (EDHEC Risk Institute).

  3. "Dynamic Allocation Strategies for Absolute and Relative Loss Control" by Daniel Mantilla-Garcia, introduces the maximum drawdown control strategy which dynamically allocates wealth between cash and a risky portfolio to keep losses below a pre-defined level. It also discusses variations like the excess drawdown and the relative drawdown control strategies, catering to different investment contexts and constraints. This working paper, revisited in the 3:3-4 2014 issue of Algorithmic Finance, delves into risk management practices crucial for implementing absolute return strategies effectively (EDHEC Risk Institute).


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