What management factors enable the ‘structural’ decorrelation of a portfolio?

A management strategy can have an impact on several levels of portfolio decorrelation.

Over a short time scale, the goal is to limit dependency on violent movements localised in time. A portfolio that seeks to limit (or end) its nominal net exposure, is particularly effective in this type of environment. Indeed, in these situations, all assets tend to correlate with one another. Thus, protecting one’s portfolio via short positions equivalent, in terms of the nominal net exposure, to long positions, is effective: the movements of the two pockets become similar to the underlying correlation, and the impact on the portfolio remains very limited. A stress test calculation is a good way of checking the dependency of the portfolio created in relation to these violent shocks.

Over a longer time period, the goal is to limit dependency on long-term movements in the underlying market. Simple delta hedging is not sufficient to achieve this objective. Over a longer time period, the differences in sensitivity between equities and their market will become apparent. Measuring beta, i.e. the sensitivity of each equity in relation to its benchmark, makes it possible to determine overall portfolio sensitivity. Thus, when constructing positions, the fund manager must seek to keep beta at a very weak absolute value to limit long-term sensitivity to the variations of the investment universe.

The specificity of the investment approach also contributes to a differentiation of the portfolio in relation to conventional investment models which are very common in the markets. For our part, we merge two approaches that are rarely combined in the industry.

First of all, we use a methodical and quantitative approach to detect investment opportunities:

• In our cash pocket, eligible positions must meet precise constraints in order not to add further risk to the portfolio.
• In our daily management, we rely on quantitative processes and models that enable us to precisely visualise the opportunities we want to pursue.

Second, we use a fundamental approach for the effective implementation of our strategies. We attempt to understand the risks implicit in each position. This enables us to validate the position in the current context and, when required, propose a suitable solution (hedging, nominal, etc.).

By applying these three levels of analysis to our own funds, we can offer investment solutions that are decorrelated from the market environment and its short- and long-term trends –indispensable complements to the conventional approach to your portfolio in this uncertain environment.