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【Introduction】Trillion-dollar asset management giant Wellington Investment Management: Multi-strategy investment portfolios can provide investors with more stable returns

China Fund News Wu Juanjuan

Trillion-dollar active asset management giantWellington Investment ManagementRoberto J. Isch, senior managing director and fund manager, recently accepted an exclusive interview with China Fund News and said that the global macro environment is becoming more volatile, and multi-strategy products have ushered in development opportunities. He said that when evaluating fund managers, it is necessary to distinguish between ability and luck, and not to judge heroes by returns alone. Qualitative evaluation of fund managers requires long-term observation to draw conclusions, and artificial intelligence is unlikely to replace this part of the work.

Roberto J. Isch said that since the beginning of this year, the Chinese stock market has shown a trend of recovery, and Wellington Investment's clients have increased their interest in Chinese assets. Although uncertainties in the real estate industry still exist, he has seen positive signs.

Wellington Investment Management has been serving institutional clients in China since 2007. In July 2022, Wellington Investment was registered as a qualified domestic limited partner (QDLP). Recently, Wellington Investment Management filed its fourth QDLP product with the Asset Management Association of China, raising funds from qualified investors in China and investing in overseas markets.

Opportunities for long-term growth of Chinese assets are emerging

China Fund News: What aspects of the Chinese market are your clients interested in?

Roberto J. Isch：Since the beginning of this year, the Chinese market has seen a series of positive developments. In April, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market", referred to as the new "National Nine Articles" for the capital market. The new "National Nine Articles" encourage listed companies to increase their dividend payout ratios through dividends and stock repurchases. So far this year, the number of stock repurchases by Chinese listed companies has increased significantly, and the total repurchase amount is at a historical high. In addition, the policy also speeds up the delisting process to improve the overall quality of Chinese listed companies.

Driving economic recovery is a priority for the government. This year, the government has released a series of monetary and fiscal policies, including cutting policy interest rates and issuing special government bonds with a total value of RMB 1 trillion. The real estate industry has received strong support, with measures such as relaxing purchase restrictions and lowering mortgage rates. In addition, the government has introduced measures such as reducing housing inventory and ensuring the delivery of houses. These measures are conducive to boosting confidence.

In the first half of this year, China achieved a 5% GDP growth. The economic situation since the beginning of this year has revealed the space for policy optimization and improvement, and also created opportunities for long-term growth of Chinese assets.

Increased macro volatility

Diversified strategies usher in development opportunities

China Fund News: What is the prospect of diversified strategies in the current global macro environment?

Roberto J. Isch：Investors around the world are increasingly interested in multi-strategy hedge funds. Multi-strategy products aim to provide diversified exposure across a group of strategies. They offer a more stable risk-return profile than single-strategy products. In some market environments, multi-strategy funds may underperform single-strategy funds. For example, when a particular strategy surges, the multi-strategy fund may not be able to keep up. However, this option is valuable for investors seeking an all-in-one solution.

We are entering a new investment environment with greater market volatility, higher inflation, and greater differences between regions, industries, and securities. Traditional asset classes may face challenges, and hedge funds have a unique opportunity to grow. In 2022, stocks and bonds showed a positive correlation. At that time, the Federal Reserve raised interest rates aggressively, and both asset classes fell sharply at the same time. If inflation proves to be more stubborn than expected, fixed income assets may not be able to hedge the risks of equity assets.

We are not suggesting that investors abandon the traditional portfolio allocation of "60% stocks and 40% bonds", but investors should re-evaluate the role of different portfolio building blocks. Portfolios need to be more resilient, and it is important to increase the number of risk and return drivers.

China Fund News: In the current market environment, how to build a strong multi-strategy portfolio? Which assets or strategies are essential?

Roberto J. Isch：Overseas hedge fund managers have a wealth of tools, including securities lending, leverage and derivatives. They are able to create a risk-return curve that is different from traditional assets (stocks, bonds). When these tools are used carefully, these hedge funds can become an important supplement to traditional assets in a multi-asset portfolio.

Overseas hedge fund managers can take different approaches to achieve risk-return targets. We divide strategies into three categories:

First up are equity long-short and market neutral strategies: buying stocks that are expected to appreciate, and selling (or “shorting”) stocks or sectors that are expected to depreciate. Equity long-short managers tend to have directional exposure to the equity market, which can come with higher volatility but also promises to provide a better source of total returns.

The second is the credit long-short strategy: It aims to exploit the price differences between related financial instruments (such as stocks or bonds) and maintain a small overall market exposure or neutral exposure. This may lead to a relatively stable return curve and may provide a differentiated source of returns.

Finally, there is the macro strategy: trading based on macroeconomic data trends or economic policy changes and investing in different asset classes. Based on a top-down perspective, use the appropriate tools to seize opportunities brought about by market fluctuations.

When evaluating fund managers, we need to distinguish between luck and ability

China Fund News: When operating an FOF portfolio, how do you select underlying assets? How do you balance the relationship between portfolio risk and the pursuit of higher returns?

Roberto J. Isch：Our process is designed to select the most appropriate type of hedge fund to achieve specific role objectives and construct a portfolio based on different strategies to achieve the overall investment objectives.

Under our framework, the roles played by underlying hedge funds can be divided into four categories: first, consistent return: providing stable returns that can compound over time; second, return enhancement: improving the overall performance of the portfolio; third, diversification: enhancing the breadth of the portfolio and adding independent sources of returns; and finally, downside protection: reducing losses during major market declines.

For example, long-short equity strategies can be used to pursue return enhancement, but are generally not suitable for downside protection. Macro strategies can provide downside protection and diversification, but generally do not provide sustained returns. Relative value strategies are suitable for pursuing sustained returns and providing a stable income stream in the portfolio.

Wellington Investment's FOF has real-time access to underlying holdings and risks, which makes real-time risk management and supervision possible. We monitor exposure and risk from various perspectives, understand the overall portfolio exposure and performance, and ensure that the portfolio configuration can provide both stable returns and appropriate diversification. We conduct scenario analysis and stress testing regularly.

In addition to quantitative indicators, we also conduct regular qualitative analysis of strategies and maintain communication with portfolio managers to understand investment philosophy, processes, styles and current investment views/position configurations.

China Fund News: How do you interact with the research team?

Roberto J. Isch：As of the end of June 2024, Wellington Investments manages more than $35 billion in alternative investment strategies, which lays the foundation for our multi-strategy hedge funds. A strategy needs to meet the corresponding conditions to be included in our FOF, and only those that can prove that it plays a role in the portfolio's return and risk targets are eligible for inclusion.

We use a research framework that combines quantitative and qualitative methods, namely the 3R framework: role, risk, and the ability to create excess returns (residual).

Role: Which of the four key roles does the underlying strategy play (continuous return, return enhancement, diversification, and downside protection). Risk: The risk that the underlying strategy takes, including the risk level, risk type, and excess return opportunities associated with these risks. Ability to create excess returns (residual): How capable is the sub-fund manager? After distinguishing between the ability and luck of the fund manager, we can see which of the fund manager's performance can be attributed to ability and which can be attributed to luck.

China Fund News: Currently, artificial intelligence can complete some of the work of fund managers. How do you evaluate fund managers?

Roberto J. Isch：AI can improve productivity by increasing operational efficiency, improving decision-making quality, and contributing to excess returns on investments. AI is expected to improve the quantitative evaluation of securities. However, quantitative evaluation is only part of the investment decision-making landscape, and qualitative evaluation of strategies also plays an indispensable role. For example, we regularly communicate with sub-fund managers to understand their current investment ideas and how they respond to different market environments. Currently, it is difficult for AI to do this.

Editor: Captain

Review: Xu Wen

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