Agnostic keeps faith in diversity

The manager of IFSL Blacksquare Multi-Manager Absolute Return points out that a range of skill and strength is essential to guarantee returns - where preservation of capital is sovereign.

Absolute return funds attracted a great deal of publicity in recent years, and the debate over the sector shows no sign of abating. Richard Sherwin, the manager of the IFSL Blacksquare Multi-Manager Absolute Return fund, seems set to add to the controversy.

“I think the first point to make is that for absolute return funds it’s essential to have a multi-manager approach,” he says. “Whereas in long-only funds the argument can be made that the fund of funds structure simply dilutes your earnings, if your aim is to provide returns under any market condition it is important to have a variety of managers who can perform in different market conditions.”

”It is important to have a variety of managers who can perform in different market conditions”

Because of this faith in diversity Sherwin says he is agnostic in terms of asserting a macro view on the portfolio. Instead he uses quantitative and qualitative screening processes to identify managers that should perform with a low degree of correlation.

Since February, when the fund was launched, the portfolio has fallen 0.84% against an Investment Management Association (IMA) Absolute Return sector average fall of 0.43%. (article continues below)

The sharp pick-up in volatility in May proved particularly brutal and absolute return funds suffered a dip in performance. Sherwin says, however, that these kind of markets can help deepen an understanding of how a manager operates.

“In May we saw the correlation in the equity long/short space increase aggressively so we pared back our exposure to the strategy,” Sherwin says.

The Blacksquare fund is diversified across discretionary, long/short and systematic strategies in a variety of asset classes so that equity long/short funds represent only a portion of the overall portfolio. Each holding has a minimum weighting of 5% with the largest single holding a 12% allocation to the JP Morgan Income Opportunities fund.

Over the past month Sherwin has altered his systematic allocation switching out of his positions in the BlueTrend Ucits fund and JPM Highbridge Statistical Market Neutral Fund. They were replaced with the Man AHL Diversified fund and the Fulcrum Alternative Beta Plus fund respectively.

“There can be hot-spots of correlation between these types of funds,” says Sherwin. “In that case it becomes a binary equation. The BlueTrend fund has been successful for us but is closed to new investment so we moved into the Man fund which it is highly correlated to.”