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World’s first risk parity bond fund
04 July 2013
Aquila Capital launches fund in face of fixed income uncertainties
Aquila Capital has launched the AC Risk Parity Bond Fund, the world’s first risk parity strategy to focus solely on fixed income. The innovative new strategy is a solution for investors who wish to retain substantial exposure to fixed income despite any challenges that may face the asset class.
The AC Risk Parity Bond Fund is designed to offer investors long-term stable returns irrespective of market conditions and we believe this will strongly appeal to a broad range of long-term conservative investors, explained Torsten von Bartenwerffer, senior portfolio manager at Aquila Capital.
“Capital is allocated based on the risk an asset contributes to the portfolio rather than predicted returns and market timing plays no role at all. Instead, 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. Sub asset classes are selected such that as one goes down, one or more of the others will rise.”
Stuart MacDonald, managing director at Aquila Capital, added that the firm’s research shows that risk parity is likely to feature in a growing number of portfolios and we believe that investors will welcome the opportunity to benefit from this strategy in the fixed income space.
“At a time when the outlook for fixed income is uncertain, our strategy offers fixed income investors a truly diversified and liquid counterbalance to their existing exposures, which may be perceived as vulnerable should fixed income markets reverse.
The Fund’s objective is to offer investors long term stable returns regardless of the twists and turns in the economic and fixed income cycle. It targets a return of cash plus 3% with annualised volatility of approximately 3%. The Fund, which is set up as a Luxemburg-based Ucits (Sicav) has a minimum investment €50,000.
It applies the same risk parity allocation principles as Aquila Capital’s long established and successful multi-asset AC Risk Parity strategy (including the AC Risk Parity 7, 12 and 17 funds), which have delivered strong risk-adjusted returns since 2004, including positive performance in 2008.
The Fund applies a systematic allocation method that does not rely on forecasts or duration targeting, while being as diversified as possible across instruments, return drivers, geographies and durations. It does this through investing with equal risk weightings across four uncorrelated types of fixed income asset.
These are government bonds, corporate bonds, carry positions in emerging markets and inflation-linked bonds. These assets also have varying correlations with the economic and fixed income cycles. As such, this combination allows positive long-term return targets regardless of whether rates are rising, falling or flat.
According to an Aquila research study, nearly two out of three European institutional investors (66%) describe current market conditions for fixed income investors as either ‘challenging’ or ‘very challenging’. Nearly three out of five (59%) say it is ‘difficult’ to generate positive performance throughout the interest rate cycle, including 15% who say it is ‘very difficult’. While almost half (44%) anticipate fixed income investors will increasingly consider using risk parity strategies.