GFG Funds - Alternative Alpha Strategy: a selection model for liquid alternative funds

2019 10 gfg funds

In a low interest rate environment, the stress experienced in the markets is evident. Two years ago, GFG (Groupe Financier de Gestion) Monaco started launching Alternative Alpha Strategy, a selection technique for liquid alternative investment funds developed in-house by GFG Lab, GFG’s quantitative division.

How was the idea of this strategy created?

"We started developing this strategy two years ago, due to the extremely low interest rate environment and our investors’ growing diversification needs," explains Francesco Romano, senior quantitative analyst. With that in mind, we developed a selection model for UCITS liquid alternative funds, that includes both a quantitative drive and qualitative analysis techniques. In the past, GFG Lab had already developed a funds allocation and selection model, AAA – Active Asset Allocation, focusing on traditional asset classes at that time. GFG Lab has capitalised on that experience to create this new model.  

What are the phases of this modelling?

The first phase is funds classification, which we carry out using an internal database of over 350 UCITS liquid alternative funds, managed by over 50 asset management firms. Using Machine Learning techniques and more specifically Clustering, we group together those funds with similar characteristics, regardless of the declared strategy conducted by their management company. From each group we select those funds with the highest alpha generation potential, in order to create a list of 20 to 40 funds.

So, is the final allocation established solely by your algorithm?

Not at all. Once the initial selection is complete, human capital takes over and enriches the model by giving it a ‘qualitative’ aspect.  Thus, each preselected fund is then analysed in depth. Management team makeup, seniority and history, communication transparency and consistency of the strategy conducted over a long period of time is all information to which we attach great importance in our decision-making process. The selection is then narrowed to 15-25 funds which will make up the investment portfolio and will, of course, be monitored on a daily basis.

How can investors benefit from this strategy?

The strategy will be implemented in a UCITS fund of funds, so each investor can benefit from the basket of alternative funds by investing in just one fund only.

To sum up, Alternative Alpha Strategy will provide investors with exposure to alternative investment strategies, by investing in a diversified basket of funds selected from the best in their class, combining Machine Learning techniques and in-depth qualitative due diligence. We will launch this strategy on a Luxembourg UCITS vehicle on 15 November.