New strategy promises uncorrelated alpha at a time when many are thinking of where to put their equity wins from the past few years
Two successive years of 20+ per cent returns on the S&P 500 should be cause for celebration, not consternation, among advisors and their clients. The public equity portions of client portfolios have been significant outperformers since the end of 2022’s bear market, but with those wins come questions of how to protect them. As advisors talk with their clients about reallocating assets, there may be opportunity for a discussion about more novel strategies that avoid any beta exposure to the S&P 500.
AGF Capital Partners recently launched an alternatives strategy aimed at minimizing beta exposure to the broader market while capturing alpha from a wide array of non-correlated sources. Ash Lawrence, Head of AGF Capital Partners, outlined the strategies accessed in the AGF NHC Tactical Fund, a feeder fund into the New Holland Tactical Alpha Master Fund LP. He explained the “niche” strategies in this fund and why its managers seek opportunities that don’t scale. He highlighted why, in the context of strong recent returns from public markets, advisors may want to consider a strategy that seeks out non-correlation for their high-net-worth clients.
“It can be a hard conversation with clients who are looking at public market returns in the double digits to introduce the idea that you might want to take some of that money and think about your portfolio construction,” Lawrence says. “But there is still the question of how you can get alpha in a way that is differentiated from your equities and your fixed income. How can you do that without beta to the S&P 500 as you start to run those scenarios, that nobody wants to happen, when things don’t go quite as planned on public markets. That’s when you’ll see some of the benefit of these alternative products.”
The new AGF Fund, Lawrence explains, explicitly seeks to provide alpha returns while minimizing beta to the S&P 500. It does so through a combination of strategies managed by New Holland Capital which are more niche and less scalable. That includes a wide array of relative value strategies. Lawrence notes the example of a commodities portfolio manager who has identified arbitrage opportunity between commodities trading at different parts of the world at different times. The fund also accesses trends like catastrophe insurance and insurance bonds.
Hedge fund strategies like quant, equity long/shorts, macro and others are folded into this fund, though Lawrence says that the portfolio construction is quite different. He claims that because of the scale some larger multi-strategy funds operate at, they tend to pile into many of the same trades. Because New Holland seeks strategies that don’t scale as well, they can keep their correlation to other multi-strategy funds minimal too.
Lawrence emphasizes that despite the diversity of strategies in the fund, it’s not a ‘fund of funds.’ There is far greater intraday transparency for advisors and managers. This can allow advisors visibility into what the portfolio managers are doing from a risk perspective, as well giving the fund managers greater control over their own balance sheets.
The AGF fund is the first Canadian access high net worth investors will get to a New Holland strategy. Based in the Cayman Islands, New Holland Capital has almost 20-years’ experience running money for institutions, including their initial work as an exclusive advisor to Dutch pensions. They currently manage around $6 billion US in assets, with $1.4 billion in the Tactical Alpha Master Fund that the new AGF product is accessing.
While it may be a challenging conversation to talk about portfolio construction and reducing exposure to an index like the S&P 500 that has done so well, Lawrence notes that strategies like this fund have entered the mainstream for high net worth clients. Clients and their advisors are now more sophisticated and have bought into the idea of seeking non-correlated returns through alternative strategies. Moreover, he argues that there are changes in the monetary environment that should motivate some discussion around these returns between advisors and their clients.
“We are outside of that zero interest rate environment and things will moderate as a result of that. In addition, we have seen volatility pick up for various reasons,” Lawrence says. “If you think about why people like alts, they like the additional alpha, but a lot of alts also have certain impacts on portfolio construction. Everyone quotes the diversification effect, but the non-correlation to traditional equities can help with volatility. The more volatility you see in equities, the more volatility you'll see in your portfolio, but you can dampen that using alternatives.”
