Some allocators always maintain a structurally steady allocation to equity market neutral as a portfolio diversifier, both for long only equity or bond exposure, and for other hedge fund strategies, many of which have become increasingly correlated to equity markets. Others more opportunistically and tactically allocate to the liquid strategy. In early 2018, the perception that some equity markets could be trading on elevated valuations, particularly based on cyclically normalised earnings, is one argument for reducing equity beta. Additionally, rising interest rates can boost absolute returns from most market neutral hedge fund strategies. As long portfolios are substantially financed by the proceeds of short sales, market neutral strategies will often be holding the majority of net assets in cash, which earns interest. Prior to the past nine years of QE, ZIRP and NIRP, market neutral strategies typically earned several percentage points of return a year from cash, plus or minus their trading performance.
Old Mutual Global Investors (OMGI)’s systematic global equity market neutral strategy, Global Equity Absolute Return (GEAR) has, since 2009, generated some of the best and most consistent risk-adjusted returns in the space, winning The Hedge Fund Journal’s UCITS Hedge performance award on several occasions. GEAR’s fee structure has marginally helped it to outperform peers that charge higher fees. The management fee is 0.75% and performance fees of 20% apply only to alpha.
GEAR targets annual volatility of 6% and a similar spread over cash returns, to imply a Sharpe of around 1.0. It has surpassed the Sharpe target but has undershot the volatility target, due to the climate of low cross-sectional volatility.
In 2013, OMGI launched a Cayman version of the strategy, Arbea, with a higher volatility target: 9%, more leverage, and potential to expand its balance sheet in order to hit the intended volatility.