The U.S. Liquidity Relative Value (S&P 500 Overlay) Strategy typically invests 80% of assets in the U.S. Liquidity Relative Value Strategy (20% of assets are held in cash for margin calls), with a 100% beta overlay of S&P 500 futures. This achieves a beta of 1.0 to the S&P 500 Index. We expect this approach to achieve significant return enhancement over the S&P 500 Total Return Index, with higher information ratio and excess returns than top ranked active equity managers.
In times of very low market volatility, the propensity for relative value distortions to arise could tend to be lower, and therefore the resulting alpha could be lower. Conversely, in times of extreme market volatility, particularly when accompanied by overall illiquidity and deleveraging, this Relative Value strategy could underperform cash.
PGIM expects the Strategy to outperform during periods in which there is reasonable volatility in the markets, and generally decent liquidity to be able to implement relative value positions. A reasonable level of market volatility has tended to result in frequent relative value anomalies and other market inefficiencies on which PGIM Fixed Income’s investment approach seeks to capitalize on.