Mat Kaleel, Diversified Alternatives Portfolio Manager, discusses the sell-off in stocks and bonds in January and how investors are turning to alternative strategies for returns that are uncorrelated to market beta.

Key takeaways

• January 2022 saw equity and bond markets fall simultaneously, driving interest in other sources of returns.
• While alternative strategies can be a source of returns uncorrelated to bond and equity market beta, January also highlighted some alternative strategies’ exposure to these markets.
• A deeper understanding of alternative strategies can help investors know what to expect through the cycle.

January proved to be a tumultuous start to 2022, after higher-than-expected inflation numbers set central banks on a path to normalisation, triggering a simultaneous re-pricing of equity and fixed income securities.

Since the onset of the COVID-19 pandemic, the past couple of years have been witness to three periods of simultaneous pullbacks in equity and fixed income markets. In the context of ultra-low interest rates, the capital destruction from periods like January are particularly meaningful events. With a new regime becoming apparent, some are looking to alternative investments for sources of returns that are uncorrelated to financial market beta.

For alternative investment strategies, January was a stress test which highlighted their direct and indirect exposure to stock and bond market beta. Pleasingly, in each of the three most recent simultaneous market sell-offs, our Global Multi-Strategy Fund has generated positive absolute returns for investors (the Fund’s underlying strategy did so in March 2020, which is prior to the Fund’s inception).

Event	Global Equities	Global Fixed Income	Australia Fixed Income	Australian Equities	Bitcoin	Global Multi-Strategy Fund*
January 2022	-2.20%	-1.66%	-1.02%	-6.45%	-14.69%	+2.56%
September 2021	-3.05%	-0.97%	-1.51%	-1.89%	-6.47%	+1.12%
March 2020	-8.32%	-2.24%	-0.21%	-20.83%	-20.13%	+1.18%*

Source: Bloomberg, Janus Henderson Investors. As at 31 January 2022. Global Equities: MSCI World ex-Australia Index (net dividends reinvested) in AUD. Global Fixed Income: Barclays Multiverse Index hedged in AUD. Australian Fixed Income: Bloomberg AusBond Composite 0+Yr Index. Australian Equities: S&P/ASX 300 Accumulation Index. Bitcoin: BTC/AUD. Fund performance is net of fees. *Composite Janus Henderson Global Multi-Strategy, net of fees (Australian unit trust was not launched at this time).

Alternative strategies can be complex, but knowledge of what is ‘under the hood’ can help investors understand how a strategy should perform through the cycle. Below we take a look at the inner workings of the Global Multi-Strategy Fund and how the underlying strategies contributed to returns in January 2022.

The Global Multi-Strategy Fund’s underlying strategies:

The Fund invests in a diversified set of bottom-up strategies, combined with a top-down ‘protection’ strategy. These are as follows:

Equity market neutral:

A stock’s valuation-range, which we determine based on its sector’s historical and future earnings prospects, highlights mispricing opportunities. Company valuations often lag share price movements as prices deviate from the stock’s range of fair value.

Implementation
When share prices move outside our valuation range, the strategy will seek to invest long, short or in pair trades to capture the stock’s potential return to fair value, while hedging out market and well-known factor exposure. Our access to these opportunities is supported by our alignment with broader firm research resources. January 2022 attribution
Equity market neutral contributed 181bps, benefiting from the sharp rotation to value stocks. The value exposure is diversified across stocks and sectors, but biased towards financials, consumer, tobacco, energy and commodity names. These worked well in December, and have continued to do so in January, as investors have begun to price in a post-COVID opening-up of the economy.

Event driven:

The strategy aims to capture price dislocations around corporate activity (for example, merger arbitrage) and corporate structures.

Implementation
The strategy seeks to capture the available spreads by taking long positions in the under-priced shares versus a short positions in the more expensive shares. January 2022 attribution
This strategy contributed 48bps.

Risk transfer:

This strategy seeks to provide liquidity to banks that are limited in how much risk they can hold on their balance sheets due to stricter banking regulations. Banks’ inability to hold the risk associated with structured notes has caused price distortions in the derivatives market, such as under-priced future dividends, cross-asset correlations and mispriced equity repurchase agreements (repos).

Implementation
The strategy typically trades listed derivatives to deliver a market neutral exposure to these mis-pricings. January 2022 attribution
Risk transfer contributed 40bps.

Portfolio protection:

Implementation
This strategy aims to generate positive returns in periods of sustained market risk to which the rest of the portfolio is normally negatively exposed. It aims to generate uncorrelated positive returns in periods of sustained market stress and to enable the other strategies to weather shorter-term market stresses in order to remain exposed to longer-term return opportunities. It is used to manage tail risks at the total portfolio level. January 2022 attribution
Portfolio protection contributed 40bps, with a very strong contribution from discretionary macro and positive returns from the trend following strategy.

Price pressure:

Fixed income price pressure:
This strategy aims to capture price differentials before and after a government bond auction. Government bond prices tend to drop pre-auction due to buyers delaying purchases, and dealers hedging anticipated allocations. Prices typically rise after auction due to missed bidders at the auction needing to buy, and reversion to pre-auction trend. Implementation
The strategy seeks to arbitrage this short-term auction discount by buying and selling within the pre- and post-auction period. Equity price pressure:
The strategy aims to capture price anomalies resulting from liquidity events where large lots of shares are offered on a primary or secondary basis. Shares are typically placed at their discounted price before the liquidity event and the discount usually disappears after the transaction. Implementation
In these events, the strategy takes long positions intended to capture the price pressure discount while hedging the overall market risk. January 2022 attribution
This strategy was flat (contributed 2bps).

Convertible arbitrage:

A fundamental, global, valuation-driven strategy seeking to profit from the discount/premium of convertible bonds relative to their underlying share price. It historically has exhibited low or negative correlation with long equity positions. Convertible bonds are often priced inefficiently, due to complexity, structural inefficiencies and investor constraints.

Implementation
This strategy seeks to capture price inefficiencies through long or short positions in convertibles, while maintaining market neutrality through hedging exposure to underlying equity, credit and interest rate risk. January 2022 attribution
This strategy was flat (contributed 8bps).

With many central banks set to raise rates to combat inflation and normalise policy, we expect more market re-pricings ahead. Looking beyond traditional sources of returns can reduce a portfolio’s reliance on market performance and offset capital losses when equities and fixed income fall simultaneously.

Disclosure on attribution:
The Janus Henderson Global Multi-Strategy Fund is a feeder fund that invests in the Australian dollar denominated class of shares of the Janus Henderson Fund – Global Multi-Strategy Fund, a Luxembourg domiciled UCITS (“Underlying Fund”). The attribution displayed above is for the EUR share class of the Underlying Fund and may vary slightly from the attribution of the Fund due to currency effects. The AUD share class has the same investment objective, investment strategy and asset holdings as the EUR share class of the Underlying Fund. Attribution on gross EUR share class returns. Differences may be due to rounding.
Important information
This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited ABN 16 165 119 531, AFSL 444266 (Janus Henderson). The funds referred to within are issued by Janus Henderson Investors (Australia) Funds Management Limited ABN 43 164 177 244, AFSL 444268 unless otherwise stated. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. This information is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. By receiving this information you represent that you are a wholesale client. Past performance is not indicative of future performance. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Prospective investors should not rely on this information and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. This information is not intended to be nor should it be construed as advice. This information is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.  Any investment application will be made solely on the basis of the information contained in the relevant fund’s offer document (including all relevant covering documents), which may contain investment restrictions. This information is intended as a summary only and (if applicable) potential investors must read the relevant fund’s offer document before investing available at our website. Target Market Determinations for funds issued by Janus Henderson are available here: www.janushenderson.com/TMD. This information has been prepared using information from a variety of sources. The information is believed by Janus Henderson to be correct but no warranty is made with respect to its completeness or accuracy.  All opinions and estimates in this information are subject to change without notice. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect. This information is confidential and must not be made available, published or distributed to any third party without the prior written consent of Janus Henderson. Janus Henderson, Intech and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.