Wegelin to launch CTA strategy, backs active indexing

The Swiss private bank and asset manager is looking to build an Asia-Pacific client base for its range of global products based on risk parity and dynamic indexing.
Wegelin to launch CTA strategy, backs active indexing

The number of investors shunning the traditional market capitalisation-weighted approach to indexing is starting to pick up, and Wegelin & Co is one firm championing the shift towards active strategies.

With $25 billion in assets under management and around 700 employees, the Zurich-based private bank has no presence and very little business in Asia-Pacific, apart from Australia. But it is looking to attract more institutional and high-net-worth business in the region, says Asia-Pacific head Robert Huber.

The firm's asset-management unit was set up in 1996, and all its products are Luxembourg-based Ucits III Sicav vehicles, which provide it with global distribution for professional investors. Wegelin Asset Management offers several quantitative-investment strategies, all of which seek to offer something unique, focusing on risk parity, volatility and dynamic indexing, says Zurich-based Huber.

The company will launch a commodity trading advisor (CTA) strategy later this year, having started offering a risk-parity fund in December. The latter utilises the so-called 'equal contribution to risk' methodology, whereby optimal portfolio weights are calculated and adjusted daily, such that each asset class and instrument with that asset class contributes equally to the portfolio's total risk.

Huber says the firm has high expectations for the new managed-futures strategy and is pleased with the way the portfolio is tracking. Wegelin is aware of the competitive market environment and is not concerned by the presence of large players such as Man AHL and Winton Capital Management, he adds.

The strategy will invest across equity, bond, commodity, currency and interest-rate markets using futures and forwards to exploit long and short trends. The fund will incorporate a risk-parity module, which will scale the instruments based on the aforementioned risk-equalisation methodology. Given the liquid nature of these trend-following strategies, Wegelin expects to be able to manage more than $1 billion.

Until now, the company's Asia-Pacific focus has been almost exclusively on Australia, although its executives have spent time in Hong Kong, Singapore and South Korea.

Wegelin has no AUM targets as such, says Huber. "Even though we are keen to bring in new business, our goal is to build long-term relationships with our clients," he says, adding that the initial focus will largely be on Hong Kong, Singapore and South Korea.

Indeed, in the third quarter of 2009, Wegelin tendered -- unsuccessfully -- for a mandate with one of Asia's largest retirement funds. "It came down to two, and we didn't get it," says Huber, who adds that the investor was looking at the firm's dynamic indexing strategy.

Wegelin is having similar conversations with other Asian institutions, and if it were to pick up business in the region, it would consider establishing a presence there, most likely in Singapore, says Huber, given the city state's dominant presence as an Asian hub.

As for product distribution in the region, Wegelin does not yet have any agreements in place, but may look at getting into such discussions in the next year or two.

Wegelin AM's two broad approaches to portfolio management are highlighted by its risk-parity fund and its dynamic indexing strategy.

The risk-parity strategy, which was born out of the idea that equity markets will have higher volatility than bonds, aims to equalise the significantly different risk profiles of the invested asset classes to provide investors with smoother returns, says Huber. Such an approach should reduce the likelihood that institutions such as pension funds or insurers fall short of funding requirements, he adds.

In addition to equalising the asset classes' risk contributions to the portfolio's total risk, the strategy seeks to minimise tail risk by applying a proprietary multi-dimensional risk engine.

"Even though institutions are long term, the reality is that they get evaluated on a monthly basis," says Huber. "This situation can create issues for regulators and retirement schemes alike, when these institutions are underfunded."

The risk-parity fund posted returns of +7% in the six months to June 30. It has a volatility target of around 8%, with downside volatility of around 5%.

Wegelin feels its dynamic indexing strategy will benefit from the fact that investors are increasingly considering active or dynamic-weighted indexing as an alternative to the traditional market cap-weighted approach.

Huber argues that investors who follow cap-weighted indices will always be overweight those assets whose values have increased the most. "If you're purchasing those on a stand-alone basis, you would want to follow the adage of buy low and sell high," he adds, "in a cap-weighted index your effectively exposing yourself to the reverse."

Citing strategies such as that of US-based Research Affiliates, which weights its index based on fundamentals, Huber says: "There's a market acceptance that cap-weighted is not the only way."

Wegelin's dynamic strategy takes a snapshot of its global investment universe, from which it determines which countries and sectors it makes most sense to allocate capital to, he says. The firm has run the strategy since 2001, providing its clients with around 5% alpha annually. Last year, for example, was a strong year for the strategy, generating over 8% alpha (in dollars, versus MSCI World).

The firm managed predominantly Swiss assets until 2002, when it started moving into its neighbouring countries, Austria and Germany. In 2006, the bank began a concerted effort to broaden the international asset base, focusing on the UK, the Nordic region, the Middle East, Canada, South Africa and the Asia-Pacific region, but not the US which is over-serviced and fraught with tax and regulatory issues.

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