Seven Investment Management (7IM) has been ramping up its exposure to alternative investment strategies as a replacement for fixed income assets.
The discretionary fund manager has embarked on a considerable push into the alternatives space due to worries about the risk of losses in bonds given current record low yields.
With fixed income no longer necessarily fulfilling its historic role of being negatively correlated with equities, 7IM has invested in hedge fund-like strategies such as market neutral and risk premium funds, as well as initiating derivatives trades such as buying put options.
The £816m 7IM Balanced portfolio has seen alternatives exposure rise from 5 per cent to more than 15 per cent as a result of this shift.
The substantial increase in alternatives has mirrored a reduction in fixed income, which is now a 15 percentage point underweight in the same fund.
Ben Kumar, investment manager at 7IM, said the search for alternatives was driven by the firm’s negative outlook on bonds and the need to find assets able to replace fixed income in its portfolio.
He said: “The big theme for us long term is this shift to alternatives. We have made a big push to get this ingrained, but it has taken us a long time to build up these positions.”
The difficulties in building up the alternatives position is illustrated by the fact that the 7IM Balanced portfolio currently only has 16.5 per cent invested in the asset class, a weighting the team is attempting to increase to 20 per cent.
Mr Kumar said the delay was due to the sheer breadth of alternatives options available, and the need to work out which ones performed as expected.
He said: “There are a lot of alternative products out there and we need to do our due diligence on them.”
Mr Kumar pointed out that these alternative strategies were mostly used by hedge funds in the past, and the fact that many had done badly indicated that alternatives were no panacea.
As part of a push to develop its expertise, 7IM last year hired a derivatives specialist so it could become involved in the likes of put option trades, which generate returns when markets fall.
In addition to ramping up exposure to alternatives, 7IM has also built up significant reserves of cash due to its bearish investment call on equities as well as bonds.
The 7IM Balanced fund’s current tactical allocation to cash is 15 per cent, up from its neutral weighting of 5 per cent. Its actual weighting to cash is even higher due to the delay in raising the fund’s alternatives exposure to 20 per cent.
Mr Kumar argued the high cash level meant 7IM had the flexibility to add to shares in the event of a correction, an event he thinks is likely to happen sooner than most market participants expect.
“There are lots of areas of the equity market that we believe are not pricing in all the risks that they should at this point in time,” he said.
