A hybrid strategy to beat inflation – invest.ch

As fears of prolonged inflation resurface in an environment of economic stagnation, investors are worried and looking for ways to protect themselves against the erosion of their capital. Fortunately, the Prosper Global Macro fund provides them with an effective and convincing response, thanks to a multi-asset strategy that combines active management and artificial intelligence.

Inflation is here for a long time

Despite what Fed Chairman Jerome Powell was able to announce last summer, the feverish rise in inflation unfortunately seems to be more lasting than “transient”.

Indeed, it does appear that the pandemic-related supply problems were only the trigger for a much more deeply entrenched price rise, a logical result of the extremely expansive monetary policies of central banks since 2008.

Worse, with labor shortages in certain sectors in the USA, we can fear a veritable inflationary spiral fueled by wage increases. This risk is all the greater since we have been witnessing for some years a strong comeback of populism and nationalism, which brings in its wake a decline in free trade and has put a stop to the globalization of the world economy. While this relocation movement has positive effects on employment in developed economies and on carbon emissions, this first impacts purchasing power.

To these long-term trends have been added over the past two months the very concrete consequences of the invasion of Ukraine by Russia on the costs of energy and agricultural raw materials. In fact, most Western countries have decided to accelerate their energy transition program in order to reduce their dependence on fossil fuels. While this will certainly be beneficial in the long term, turning off the tap on Russian gas and oil translates into an immediate jump in energy costs, which ripples through most sectors.

A hidden tax

Faced with this rise in prices, which promises to be lasting, central banks are naturally very attentive, since their main mandate remains the fight against inflation. The US Federal Reserve has already started to raise its key rates and has announced successive increases throughout the coming months. For its part, the ECB is procrastinating and trying to gain time but cannot remain inactive for long in the face of soaring prices.

However, these measures could well remain superficial, because if the erosion of purchasing power is very unpopular with consumers who are also voters, it must be admitted that inflation suits most governments well. Indeed, through the erosion of the nominal value of the debt, it allows them to discreetly reduce their indebtedness, without having to take politically difficult measures such as tax increases or cuts in social budgets. It is therefore a sort of hidden tax, all the more useful as it avoids slowing down the economy at a time when recession threatens. Given the huge increase in public debt that the protective measures against the health crisis have brought about and all the more so with the economic slowdown caused by the war in Ukraine and its attendant sanctions, we can therefore expect states prefer to maintain accommodating monetary and fiscal policies for as long as possible, even if it means letting prices soar.

Inflation, an investor’s nightmare

For investors, this scenario is rather unfavorable, both for fixed income investments and for equities. Indeed, any increase in interest rates intended to fight against inflation would mathematically lower the prices of existing bonds. And if the rates remain unchanged, it is the value of the capital that will crumble at maturity. The situation is hardly more favorable for equities. In fact, there is a risk of seeing investors, attracted by higher remuneration, leave the stock market in favor of fixed income, which would cause stock prices to fall. In addition, many companies will see their costs increase but will not be able to pass this increase entirely on to consumers. Their profits will therefore fall, bringing with them their stock market prices.

Let’s not forget that the goal of any investment is not only to obtain a nominal gain. It is above all to preserve, and if possible to increase, the purchasing power of the investor in real terms. In an inflationary situation, it is therefore important that an investment not only beat a benchmark index, but above all that it generates a return higher than inflation, failing which any capital gain will only be illusory. So what are the assets that provide protection in the event of a prolonged price increase? Although there are several in theory, such as inflation-indexed bonds (TIPS), defensive stocks, gold or even real estate, they are far from being a panacea and their results have often been disappointing in the past.

The solution, hybrid strategy

Under current conditions, the best solution is undoubtedly to adopt active and very flexible management, with a strategy halfway between traditional funds and hedge funds. Indeed, to obtain effective protection against inflation, one cannot rely on a single miracle asset class. You have to combine several of them and actively manage them, combining “long” and “short” positions. In these uncertain conditions and to cope with rapid changes in market conditions, the right investment must combine great flexibility, an extensive investment universe comprising a wide range of asset classes and management focused on risk control.

A proven strategy is that of the Prosper Global Macro fund, a UCITS Multi-Asset fund that combines different assets offering a real return, such as equities, bonds, currencies, commodities, listed real estate , alternative investments and derivatives.

And because the best way to reach its destination is to announce it clearly, the objective is defined: the fund aims to beat inflation by 5% per year over a market cycle with a budget given risk.

The best of two worlds

As seen below, the strategy has many advantages over traditional funds and classic hedge funds. It obtains performance in real terms and not just nominal terms, with managed volatility and low leverage. Thanks to its wide range of opportunities, the sources of performance are multiple, coming from both beta and generated alpha. Being structured in the UCITS format, it also provides the investor with total transparency, daily liquidity and excellent regulatory solidity.

Prosper Global Macro thus combines the advantages of a traditional asset allocation fund – in terms of regulation, transparency and liquidity – and those of a hedge fund, in terms of flexibility and variety of sources of performance.

Artificial intelligence at the service of value

To enable the management team to make the most of the opportunities that arise, the fund follows an unconstrained approach. Thus, if the strategy has clear limits in terms of exposure for each asset class, the net allocations can vary within wide bands (for example from -25% to +50% for equities, from -30% to +60% for government bonds or even from 0% to 49% for cash) and the fund has no neutral strategic allocation, which would constitute a kind of lazy ear for the managers.

To select their investments, managers identify assets that can generate a real return. To do this, given the size of their investment universe, they also use an artificial intelligence system that systematically analyzes some 7,000 stocks. This state-of-the-art technology makes it possible to process an enormous amount of data (Big Data) very quickly and provides clear signals allowing the management team to significantly improve their results. Traditional fundamental analysis complements this systematic approach.

Strict risk management

Given the absence of allocation constraints and the complex interactions that may exist between the different asset classes, it is essential to have strict risk management. This is why a clearly defined risk budget is allocated to the managers, with a maximum VaR of 8%.

Since diversification is the most effective method of controlling portfolio volatility, investments are very broadly spread across asset classes, regions, styles and instrument types. In addition, state-of-the-art proprietary quantitative systems continuously monitor the absolute and relative risks of the portfolio. Real-time simulations are carried out in order to assess the potential impacts of various events and planned investments. The artificial intelligence system helps to significantly reduce the risk thanks to warning signals in the event of unfavorable changes in certain factors.

And the results are there

Since its launch in 2015, the fund has largely fulfilled its contract. First of all, as can be seen in the graph below, it has largely beaten inflation, which is its priority objective.

2022.05.06.Graph performance

Its cumulative performance is thus +32.3% (compared to +4.2% for its benchmark index), with very controlled volatility (7.6%), low downside risk (Maximum drawdown: -12.1%) and a monthly MVar of 6.3 %, well below the maximum budget of 8%.
Its good results allow it to rank in the 1st quartile over 1 year, 3 years, 5 years and since its launch (Citywire universe) and to be rated 5 stars by Morningstar. The managers also have an AA Citywire rating.

Key points

  • Real return objective (inflation + 5% per year over a market cycle)
  • A unique fund, hybrid between asset allocation fund and hedge fund
  • Diversified, liquid and flexible multi-asset portfolio
  • Value positioning offering high portfolio yield and downside protection.
  • Priority on risk control
  • Management aided by a proprietary artificial intelligence (AI) systemManaged by Plurimi, a multi-award-winning London-based management team (rated Citywire AA)
  • Ranked first quartile over 1 year, 3 years, 5 years and since its launch in 2014 (Citywire Global Macro universe).
  • Luxembourg UCITS fund with daily liquidity with shares with and without retrocession in different currencies hedged

To click here to learn more about the fund

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A hybrid strategy to beat inflation – invest.ch

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