(July 4, 2013) — Alternative asset manager Aquila Capital has launched what it claims is the world’s first risk parity bond fund in an effort to target investors who want more from their fixed income portfolios.
Taking the basic principles of risk parity, the bond fund is comprised of four risk-weighted tranches of fixed income assets, which are designed to be uncorrelated with each other.
Comprised of inflation-linked bonds, government bonds, corporate bonds and carry positions in emerging markets, the AC Risk Parity Bond Fund is a long-only strategy with no leverage.
As such, it targets cash plus 3% and an annualised volatility of 3%.
There are no overlays, nor dynamic tweaking capabilities. Other than some currency hedging, Aquila Capital’s design is purely passive.
Aquila Capital’s managing director Stuart MacDonald told aiCIO the decision to not include leverage was taken after speaking to investors: the feedback was clear, they didn’t want leverage and they thought it was very difficult to call where the market was going.
Research carried out by Aquila Capital ahead of the fund’s launch showed 71% of the 165 European pension fund professionals asked believed it was “difficult” for fixed income investors to forecast the timing and direction of future interest rate movements over a three year period.
Aquila Capital’s survey also found 80% of pension fund professionals believed rising interest rates was an “important” or a “very important” challenge for their fixed income portfolios.
Aquila Capital’s backtesting of the risk parity bond fund showed even in 2006, when the Euribor rose every month for a whole year, the bond would have produced a return of 1.9%, net of fees.
Portfolio manager Torsten von Bartenwerffer said the product was created to serve investors with long-term, stable returns.
“We believe this will strongly appeal to a broad range of long-term conservative investors,” he said.
“The strategy focuses on managing uncertainty through effective diversification between assets that have no correlation to each other, and which have various correlations to different phases of the economic and fixed income cycles.”
Currently the capital allocation sees 23.1% of the fund in inflation-linked bonds, 23.4% in government bonds, 23.3% in carry positions in emerging markets, and the heaviest weighting given to corporate bonds at 30%.
The fund, which has been set up as a UCITS (SICAV) fund, requires a minimum buy-in of €50,000, and charges a management fee for the institutional class of 0.45%.
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