JANA Alternatives Research Trip 2023: Unearthing current & emerging opportunities

In June 2023, JANA’s Alternatives team undertook an international research trip, primarily based in the UK while also attending the annual Goldman Sachs Hedge Fund conference in Rome, Italy. Iain North, Head of Alternatives Research, and Martin Rea, Senior Consultant, visited 30+ investment managers as the team continues to build out JANA’s broad alternatives platform spanning liquid mid-risk, hedge fund, alternative yield, and special opportunity strategies. Iain’s prior experience of 10+ years investing directly into some of the world’s leading hedge funds complemented Martin’s perspective as a prior global bond portfolio manager.

Key takeaways from the research trip included:

1. Ongoing growth of alternative yield strategies that can complement traditional credit / bond allocations with uncorrelated performance drivers.
2. Re-emergence of global macro investment strategies supported by strong tailwinds including higher inflation, central banks in-play, and increased regional economic dispersion.
3. Strategic relationships, and the increasing role they can play for investors wishing to “get set” in alternatives with numerous tangible benefits.

Alternatives continue to be a focal area for institutional investors wishing to diversify equity and bond risk as the economic outlook remains uncertain and monetary policy remains tight, the latter of which continues to put pressure on traditional asset class returns. Industry stakeholders largely agree that the next ten years will be very different from the prior ten, when investors were awarded attractive gains due to global monetary easing and near-zero interest rates supporting risk assets.

Alternative Yield remains a focus despite higher bond yields.

In 2021 we published a paper entitled “The Rise of Alternative Yield in Modern Portfolios” – showcasing a number of strategies that clients could look to for consistent yield-like returns amid the COVID-induced ultra-low interest rate period of 2020-2021. These strategies are designed to provide investors with steady performance compared to lower yield & higher risk traditional bonds and credit strategies. While conventional bond yields have improved over the last 12 months, JANA continues to build out its research platform to cover very different types of Alternative Yield strategies including:

JANA met with several managers across the above spectrum of strategies during the trip, and while traditional credit and fixed income now offer higher yields than 12 months ago, we feel these alternative strategies can play an important role within defensive allocations due to their risk profile, which are not dependant on if/when interest do fall again. For example, many of the strategies produce up-front cash flow yield and are not correlated to short term credit market swings. A summary of these strategies is outlined below.

Insurance Linked Securities strategies (ILS) currently offer both a tactical and strategic opportunity. As per the below chart, yields are at decade-level highs. ILS strategies purchase bonds that are linked to insurance related events such as hurricanes & earthquakes. Several managers in the space noting that ILS and certain reinsurance strategies currently offer the best risk/return profile seen in their careers:

Global Macro – resurgence of a classic hedge fund strategy

Global Macro was a much talked about area during the research trip. Global macro funds can take long or short exposures across equity, bond, FX and commodity markets based on a manager’s economic & policy-based views.

After 10yrs + of ultra low interest rates and low volatility, macro funds are enjoying a resurgence of opportunities which has led to strong performance for investors, especially over 2022. With the re-emergence of inflation and central banks back “in play”, macro has again shown its ability to offset risk-off sentiment and capitalise on paradym shifts in market behaviour.

Supported by investor sentiment at the Godman Sachs alternatives conference and manager views, we believe the forward looking outlook for macro remains positive, driven by:

1. Higher interest rates leading to higher cost of capital and more selective asset allocation choices.
2. Central Banks at differing stages of their tightening / easing cycles.
3. Increased geographical economic dispersion.
4. Ongoing supply & demand imbalances creating commodity price trends.

Custom solutions & strategic relationships

Strategic Relationships have become a key route for larger sized investors to ‘get set’ in alternatives. Through a strong governance structure and a win-win mentality, investors are looking to partner with specialist allocators with multi-asset capabilities across hedge funds, private credit, direct property and private equity.

A partnership can provide institutional investors with a range of tangible benefits including:

1. Exposure to hard-to-access opportunities and managers.
2. Stream-lined Investment & and Operational Due Diligence and structuring considerations.
3. A “one manager – multiple strategies” approach.
4. Highly customised program parameters including fees, liquidity, and risk / return targets (i.e. correlations).
5. Co-investment and seeding opportunities though existing legal structures.

JANA continues its work in the area with several shortlisted and preferred partnership providers.

Conclusion & Key takeaways:

1. Alternative yield remains a focus despite the recent rise in cash rates and government yields. JANA continues to build out its alternative yield platform that can provide uncorrelated strategies to complement traditional credit allocations. Strategies can range from Cash +2% to Cash +10% expected return, with a varying degree of liquidity terms.
2. Global macro has returned as a top performing strategy. The outlook remains strong with central banks in play, differing growth and inflation dynamics, and supply and demand imbalanced creating opportunities.
3. The demand for top-tier hedge funds and alternatives providers remains strong especially across the sovereign wealth fund and large pension fund community. There has been a trend of investors to partner with large, sophisticated allocators across hedge funds, private credit, direct property, and private equity as investors get larger and opportunities become more complex.