Hybrid strategy to overcome inflation

As fears of prolonged inflation resurface amid economic stagnation, investors are worried and looking for ways to protect themselves from the erosion of their capital. Fortunately, Prosper Global Macro provides them with an effective and compelling response through a multi-asset strategy that combines active management and artificial intelligence.

Inflation has been here for a long time

Despite the fact that the head of the Federal Reserve, Jerome Powell, was able to announce last summer, the feverish rise in inflation, unfortunately, does not seem just “fleeting”, and now we can fear, on the contrary, that it will continue.

Indeed, pandemic supply problems seem to have been just a trigger for much deeper price increases, a logical consequence of central banks’ extremely expansionary monetary policies since 2008.

Worse, due to labor shortages in certain sectors of the United States, we may fear a real inflationary spiral fueled by rising wages. This risk is all the greater as we have seen a strong return to populism and nationalism over the years, which has led to a decline in free trade and halted the globalization of the world economy. Although this movement has a positive effect on employment in developed countries and on carbon emissions, it primarily affects purchasing power.

To these long-term trends over the past two months have been added the very specific consequences of Russia’s invasion of Ukraine on the cost of energy and agricultural raw materials. In fact, most Western countries have decided to accelerate their energy transition program to reduce their dependence on fossil fuels. While this will undoubtedly be beneficial in the long run, the shutdown of the Russian gas and oil tap leads to an immediate jump in energy costs, which extends to most sectors.

Hidden tax

Faced with this promising rise in prices, central banks are, of course, very vigilant, as their main mandate remains to fight inflation. The US Federal Reserve has already begun raising key rates and has announced a steady increase in the coming months. For its part, the ECB is procrastinating and trying to buy time, but cannot remain idle for long in the face of rapid prices.

However, these measures may well remain superficial, as if the decline in purchasing power is very unpopular with consumers who are also voters, it must be acknowledged that inflation is good for most governments. In fact, by blurring the face value of debt, it allows them to reduce their debt imperceptibly without taking politically difficult measures, such as raising taxes or cutting social budgets. Thus, it is a kind of hidden tax, all the more useful because it avoids the economic slowdown at a time of recession. Given the huge increase in public debt caused by measures to protect against the health crisis, and even more so due to the economic slowdown caused by the war in Ukraine and related sanctions, we can expect states to prefer to maintain tailored monetary and fiscal systems. policy as long as possible, even if it means raising prices.

Inflation, an investor’s nightmare

For investors, this scenario is quite unfavorable, both for fixed income investments and for stocks. In fact, any increase in interest rates aimed at fighting inflation will mathematically reduce the price of existing bonds. And if rates remain unchanged, it is the cost of capital that will fall at maturity. The situation is hardly more favorable for stocks. In fact, there is a risk that higher-paying investors will leave the stock market in favor of a fixed income, which will lead to falling stock prices. In addition, many companies will see an increase in their costs, but will not be able to fully pass this increase on to consumers. Therefore, their profits will fall, which will bring prices in the stock market.

Let’s not forget that the purpose of any investment is not only to obtain a nominal return. This is primarily to preserve and, if possible, increase the purchasing power of the investor in real terms. Therefore, in the context of inflation, it is important that the investment not only exceeds the control index, but, above all, that it brings more profit than inflation, otherwise any added value will be only illusory. So which assets provide protection in the event of a prolonged price increase? Although in theory there are several, such as inflation-linked bonds (TIPS), defense stocks, gold or even real estate, they are far from a panacea, and their results have often been disappointing in the past.

Solutions, hybrid strategy

Under the current conditions, the best solution is undoubtedly active and very flexible management with a strategy halfway between traditional funds and hedge funds. Indeed, to get effective protection against inflation, you can not rely on a separate class of miracle assets. You need to combine several of them and actively manage them, combining “long” and “short” positions. In these uncertain conditions and in order to cope with rapid changes in market conditions, the right investment must combine great flexibility, a large investment universe that includes a wide range of asset classes and risk-focused management.

A proven strategy is Prosper Global Macro, a UCITS multi-asset fund that combines a variety of real-income assets such as stocks, bonds, currencies, commodities, listed real estate, alternative investments and derivatives.

And because the best way to achieve your goal is to make it clear, the goal is set: the fund seeks to beat inflation by 5% a year during the market cycle, taking into account budgetary risk.

The best of both worlds

As shown below, the strategy has many advantages over traditional funds and classic hedge funds. It is effective in real terms, not just in nominal terms, with controlled volatility and low leverage. Due to the wide range of capabilities, the sources of performance are diverse, both from the beta version and from the generated alpha version. Structured in the UCITS format, it also provides the investor with full transparency, daily liquidity and excellent regulatory reliability.

2022.05.06. Transparency of liquidity

Thus, Prosper Global Macro combines the advantages of a traditional asset allocation fund – in terms of regulation, transparency and liquidity – and a hedge fund in terms of flexibility and diversity of sources of efficiency.

Artificial intelligence at the service of value

To enable the management team to make the most of the opportunities that arise, the fund follows an unrestricted approach. Thus, if the strategy has clear risk limits for each asset class, net distributions can vary widely (eg, -25% to + 50% for equities, -30% to + 60% for government bonds, or even 0% to 49% for cash), and the fund does not have a neutral strategic distribution, which would be a kind of lazy ear for managers.

To select their investments, managers identify assets that can generate real profits. To do this, given the size of their investment universe, they also use an artificial intelligence system that systematically analyzes about 7,000 securities. This state-of-the-art technology allows you to process huge amounts of data very quickly and provides clear signals, which allows the management team to significantly improve their results. Traditional fundamental analysis complements this systems approach.

Strict risk management

Given the lack of distribution restrictions and the complex interactions that may exist between different asset classes, it is important to have strict risk management. That is why managers are allocated a clearly defined risk budget with a maximum VaR of 8%.

As diversification is the most effective method of controlling portfolio volatility, investments are very widespread in asset classes, regions, styles and types of instruments. In addition, modern patented quantitative systems constantly monitor the absolute and relative risks of the portfolio. Real-time simulations are performed to assess the potential impact of various events and planned investments. The artificial intelligence system helps to significantly reduce the risk due to warning signals in case of adverse changes in certain factors.

And the results are there

Since its launch in 2015, the fund has largely fulfilled its contract. First of all, as shown in the chart below, it has largely overcome inflation, which is its priority.

2022.05.06. Execution of the schedule

Thus, its total productivity is + 31.0% (compared to + 6.0% for the control index), with very controlled volatility (7.6%), low risk of decline (Maximum drawdown: -11.9%) and monthly MVar 4.3%, well below the maximum budget of 8%.

His good results allow him to get into the 1st quartile in 1 year, 3 years, 5 years and since its launch (Citywire universe) and get 5 stars from Morningstar. Managers are also rated AA Citywire.

Key points

  • Real return target (inflation + 5% per year during the market cycle)
  • A unique fund, a hybrid between an asset allocation fund and a hedge fund
  • Diversified, liquid and flexible portfolio with many assets
  • Value positioning provides high portfolio profitability and protection against decline.
  • Risk control priority
  • Patent Artificial Intelligence (AI) Management Led by Plurimi, an award-winning London-based management team (Citywire AA rating)
  • The first quartile in 1 year, 3 years, 5 years and since its launch in 2014 (the universe of Citywire Global Macro).
  • Luxembourg UCITS fund with daily liquidity with shares with retrocession and without hedging in different currencies

To press here to learn more about the fund