Allianz Global Investors (AllianzGI) has expanded its liquid alternatives platform with the launch of the Allianz Structured Return fund, a new structured absolute return strategy designed to pursue positive returns independent of market conditions, while managing downside risk.
The new fund, which is aimed at European and Asian retail investors, is managed by portfolio manager Stephen Bond-Nelson (pictured), and Greg Tournant, CIO US structured products at AllianzGI. The product follows on a number of strategies the structured products team at AllianzGI in New York has been running for a number of years involving US broad-based index options, according to Bond-Nelson.
"The strategy is designed to be an absolute return fund that generates a targeted return level in the mid-single digits regardless of the market environment," said Bond-Nelson. "We are targeting a 4% to 6% return objective on an annual basis whether the market is going up, down or sideways."
The fund offers a large client base the accessibility to an attractive market neutral return profile with daily liquidity and different share classes available for institutional and retail investors. The fund's core position consists of short in-the-money call options on the S&P 500 Index, covered by a long passive position in the index. Other option positions are also constructed to mitigate risk and for portfolio diversification. The fund seeks to benefit from the return-generating benefits of selling options while maintaining the ability to navigate as wide a range of potential market outcomes as possible.
The new strategy uses a combination of equity index call and put options at carefully selected strike and duration profiles, with the objective of generating consistent, positive, single-digit returns regardless of the market environment, said Bond-Nelson. 'From a risk perspective, the fund's risk profile is comparable to that of a fixed-income portfolio - yet it does not have the associated credit, duration, or interest rate risk,' he said.
"The primary instruments we used to implement our strategy are US index options," said Bond-Nelson. "In this particular fund we are only trading options on the S&P 500 and our core position is made up of a combination of a long passive exposure on the S&P 500 and then sold against that are in the money S&P 500 index call options."
According to Bond-Nelson, by nature of the fact that the strike on the call is in the money and not out of the money it turns that position into a market neutral position so if the market is range-bound the portfolio will be accruing the option premium as part of the strategy.
"As opposed to an index fund, this fund is not designed to be equity returns plus a little bit but to be an absolute return fund," said Bond-Nelson. "We think that risk profile is very attractive in the current environment with significant equity variations and yields at an all-time low, and it should deliver what ordinarily can be considered the risk/return profile of a bond portfolio but without any credit, duration or interest rate risk."
The AllianzGI Structured Return Fund is the Ucits version of a fund AllianzGI launched in 2008 which has been running in a mutual fund form in the US since 2012, and has assets over US$275m. "The fund is a mutual fund in the US and a Ucits in Europe, and does not have any structured notes or products in the conventional way," said Bond-Nelson.
A recent paper published by AllianzGI shows that the use of alternative investments is now a global phenomenon, with nearly three in four institutional investors around the world investing in alternative assets. According to AllianzGI's research, diversification is the most important reason for institutional investors allocating to alternatives (30%), followed by low correlation to other asset classes (25%) and their ability to generate higher returns than bonds or equities (14%).
Regarding liquid alternatives, three in five (57%) investors believe that in the current market environment they play an important part in portfolio construction, and nearly as many (56%) agree that they provide attractive risk-adjusted returns relative to traditional investments and asset classes.
The team led by Bond-Nelson is already managing the Structured Return strategy in the US since December 2012. The investment platform, launched in September 2005, provides absolute return and return-enhancement solutions for its clients, and as of July 31, the team manages US$5.3bn in option portfolios.
The strategy aims to deliver what clients need most: reliable outcomes for taking bond-like risk, according to Deborah Zurkow, head of alternatives at AllianzGI. 'In a period marked by sustained low interest rates and market volatility, the ability to generate positive returns from largely uncorrelated risk factors will be a key driver for further growth of alternatives strategies," said Zurkow.
SRP data shows that there are more than 262 products across jurisdictions marketed by different subsidiaries of Allianz of which 76 are still live products including 61 life insurance products, 14 structured funds, three open-ended structured pension funds, and two structured notes.
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