Forget trends and focus on strategy: Acadian

A new whitepaper from Acadian Asset Management has pled the case for investors to adopt systematic extension strategies as they face ongoing volatility in markets.

The paper, titled Thinking broadly: Improving active performance via systematic extensions, highlighted concerns about investors’ “insatiable search for alpha” and the potential impacts this would have on the levels of risk in portfolios.

The paper said concentrated equity strategies grew popular in the last 10 years as they “generate substantially higher returns dispersion due to limited flexibility in risk control and foregone diversification”.

It recommended systematic extension strategies, such as 130:30 long/short strategies that have the ability to “relax the long-only constraint and potentially exploit mispriced assets on both the long (undervalued) and short (over-valued) side”.

“With long-only equity strategies, investors can only buy stocks. As such, managers are looking for companies where they believe the share price will converge to the manager’s higher target price,” Jean-Christophe de Beaulieu, Acadian’s Head of Investments in Australia, said.

“When equities are expensive, their opportunity set is reduced. The only thing long only managers can do if they don’t like a stock is choose not to hold it in their portfolio.

“Long/short equity strategies, on the other hand, can also express a negative view on a stock through shorting. This increases the opportunity set and has the potential to amplify the exposure to sources of returns while better controlling for the risk.”

Gillian Savage, Chief Executive Officer, Acadian Asset Management Australia said interest in systematic extension strategies has returned in recent months after it dropped off around the Global Financial Crisis period.

“Systematic extension strategies represent a form of high conviction, active investing but they have been underappreciated and under-utilised for years due to hazy perceptions of their underperformance around the GFC and concerns about risks associated with shorting,” she said.

“However, relaxing the long-only constraint increases flexibility in managing portfolio exposures and enables investors to outperform in different market conditions.

“Moreover, relative to other approaches to high conviction active investing, which may rely on low-breadth bets, deliberately sacrifice diversification, or mask economic risk, systematic extensions are a highly disciplined approach to achieving investment objectives.”