Anchor to Windward: Aligning Absolute Return Objectives

PGIM Institutional & Advisory Solutions

June 2018

Following the financial crisis, institutional investors began to place greater focus on investment objectives such as downside diversification, lower tail risk, and performance consistency. Institutional investors turned to hedge funds and other alternatives to incorporate more stable, diversifying return streams into their portfolios. But with unexpected shortcomings with their hedge fund investments, investors have become increasingly interested in more liquid, transparent strategies.

PGIM’s Institutional Advisory & Solutions introduce a new measure of performance sustainability, the Anchor ratio, which can help investors identify strategies and funds with more consistent and sustained performance, as well as other desirable performance characteristics.

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On average, IAS found that:

  1. Absolute Return, Event Driven and Credit Long Short strategies provided relative consistency (as measured by the Anchor ratio), altogether with attractive risk-adjusted returns. 

  2. Equity Long Short was attractive from a risk-adjusted return perspective 

  3. Absolute Return, Multi-Strategy, Event Driven, and Discretionary Macro were most effective in controlling tail risk 

  4. Managed Future alone stood out for downside diversification

  Objective

Performance Sustainability

Lower Tail Risk

Downside Diversification

Risk-Adjusted Return

  Measure

Anchor Ratio

95% CVaR

Downside Equity

Sharpe Ratio

Absolute Return

x

x

 

x

Multi Strategy

x

x

 

 

Event Driven

x

x

 

x

Volatility

x

 

 

 

Credit Long Short

x

 

 

x

Equity Long Short  

 

 

 

x

Macro*

 

 

 

 

Discretionary Macro

 

x

 

 

Managed Futures

 

  x  

 

 Learn more about PGIM Institutional Advisory & Solutions

 

* In the game of Cricket, the anchor is a top-order batsman capable of batting for a long duration throughout the innings. Despite playing defensively, the anchor is often the top scorer. In finance, we often use the “hit rate” to evaluate consistency of a manager’s skill, where the hit rate is defined as the ratio of the number of correct decisions as a percentage of total decisions. However, the missing concept is the notion of performance sustainability. How long can a manager hit without having a miss?