Portfolio Manager Perspectives

Jeff Benjamin

Diversified alpha bets? This alt fund's got them

Causeway fund seeks to curb volatility, enhance returns through use of leverage

Jul 24, 2012 @ 1:11 pm

By Jeff Benjamin

Causeway Capital alpha volatility
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Some alternative strategies just seem to make sense, even if the strategy is a bit complex. That's the case with the Causeway Global Absolute Return Fund Ticker:(CGAVX).

While any fund dubbed “absolute return” is automatically setting the bar way too high, this fund deserves some credit for making every effort to remove market beta, which theoretically would leave investors with alpha, or absolute returns.

The key, according to lead manager and Causeway Capital Management LLC chief executive Sarah Ketterer, is the use of leverage on both the long and short side of the portfolio.

The fund, which was launched in January 2011, starts with quantitative analysis to develop enough short-side exposure to replicate and effectively eliminate broad-market exposure.

“On the short side, the stocks are there to take the beta of the world index out of the portfolio,” Ms. Ketterer said. “In order to have market sensitivity, you have to take the market out of the portfolio.”

She added that besides taking the beta out, the short side includes stocks that will deliver alpha by underperforming.

The $55 million fund holds 130 stocks on the short side and about 45 no the long side. “Based on our back-testing, the optimal leverage to reach our goals is three times, or one-and-a-half times on each the long and short side,” Ms. Ketterer said.

While part of the alpha is coming from the short side, the bulk of it comes from the long positions, which is essentially a leveraged version of the Causeway Global Value Fund Ticker:(CGVIX).

“We recognize the proliferation of alternative funds, but we don't see any that are truly diversified sources of alpha,” Ms. Ketterer said. “The genesis of this strategy came from our clients who asked for a lower-volatility return stream, and this [absolute-return fund] was our solution.”

The fund, which is up about 4% from the start of the year, is categorized by Morningstar Inc. as market-neutral, which has a category average return this year of less than 1%. The S&P 500 is up 9.6% from the start of the year.

To really see what the fund is capable of as an alternative strategy, one needs to consider the fund's performance over the past three months, when it gained 4.5% while the S&P 500 fell by nearly 1%.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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