Global Sector Fund will invest in a group of sector-specific managers
Global Fund Analysis (GFA) is to launch a portfolio that hedges volatility by investing in a small band of sector-specific managers with an overlay of short positions.
The objective of the portfolio, to be called the Global Sector fund, will be to generate excess returns against cash within a managed tracking error.
The Cayman-domiciled fund, due for launch this year, will be managed externally by Piotr Poloniecki of Apollo Advisors.
The first stage of the fund's strategy will be to pick sector-specific managers who are good stockpickers but who have high volatility associated with their funds. Manager selection will be shared by GFA and Apollo.
The portfolio will start with an investment in around five funds. Poloniecki intends to invest with long-only fund managers initially because 'there have been some constraints on the available capacity in some of the long/short universe.'
The managers he picks will be heavily research-driven and sector-specific, but not because he is seeking sector bets. In fact, he wants to avoid market or sector bets and benefit purely from the stockpicking skills of the managers.
'We go for sector pickers because they are better at picking in their areas,' said Poloniecki.
Each of the managers will operate in a specialist area such as mid-cap healthcare or Canadian energy stocks, so their stockpicking skills in that particular area are likely to be good, Poloniecki said.
'The trick is to bring together a family of volatile managers and then hedge out the volatility,' he added. 'We do it by analysing the actual portfolios of all the underlying managers.'
To hedge against the volatility of the funds, Poloniecki will overlay the portfolio with short positions. The number of positions will depend on their size, but will probably be no more than 50.
Apollo's technology will be used to analyse which short positions Poloniecki requires to hedge against the volatility of the funds in which the portfolio are invested.
The strategy depends on picking managers with very transparent portfolios, in which Poloniecki can see individual positions and, therefore, judge how to hedge against them.
'A lot of this is quant-driven,' he said. 'We do a lot of quant work to find out if there really is stock alpha.'
The intention is to create a completely market neutral fund that depends entirely on the stockpicking ability of the underlying managers.
The strategy means unless the fund borrows, some of the capital invested will be kept back for the overlay, so there will not be 100% exposure to the underlying funds.
Poloniecki established Apollo Advisors in 2000 following the sale of Eldon Capital to Swiss Re in order to extend the use of risk management and multi-manager investment strategies he began at Eldon.
He pioneered the application of dynamic risk management to multi-manager and global equity portfolios at Eldon, a financial sector specialist investment manager he launched in 1992.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till