"A German insurance company engaged bfinance to provide support in evaluating their liquid alternatives portfolio, which focused on conservative investments and utilized low net exposure and market neutral strategies. The company experienced a sustained increase in assets due to the success of their insurance program, prompting the leadership team to assess portfolio allocations and develop a strategic plan for future investments."

Engagement Summary :

A German insurance company partnered with bfinance to review their conservative liquid alternatives portfolio, which utilized low net exposure and market neutral strategies. The company experienced significant asset growth due to a successful insurance program and wanted to reassess portfolio allocations and develop an action plan for future investments.

1. Client-Specific Concerns:

   The insurance company had already established an internal team to oversee the market-neutral portfolio, designed to align with their insurance program objectives. However, they wanted to address any potential gaps, biases, or risk concentrations in the existing portfolio, consisting of 12 external managers. The client sought bfinance's assistance to identify and mitigate manager-specific risks and receive guidance on strategy-level enhancements for their growing assets.

2. Outcome:

   Client-Specific Research: bfinance conducted a comprehensive review of the portfolio and found it to be well-diversified, with a diversification ratio of 51.7%. This ratio effectively reduced undiversified volatility from 3.2% to 1.6% per annum. Identifying Potential Sources of Risk: The liquid alternatives portfolio focused on alternative risk premia (ARP) and equity market neutral strategies. The team observed a potential over-allocation to equity long-short strategies, which posed direct and indirect risks to the portfolio. Analyzing Portfolio Volatility Drivers: A significant risk overweight was identified in the volatility premium, which accounted for 23% of the portfolio and relied on short volatility exposure. The team also noted a bias towards systematic strategies (75%) compared to discretionary approaches (25%) and a preference for fundamentals-driven strategies over market stress-driven ones.

3. Portfolio Reconceptualization:

   Through quantitative and qualitative assessments, bfinance identified high-quality multi-strategy managers as core holdings that aligned with the client's objectives. They recommended sizing mandates of other single-strategy managers as high-alpha satellite allocations.

Accommodating Future Asset Growth: To accommodate future asset growth, bfinance proposed a core-satellite approach. This would allow the client's in-house team to focus on selecting and sizing satellite allocations, while the alternative risk premia/multi-strategy "core" would efficiently handle excess cash without impacting the satellite portfolio weights.