Investing in Liquid Alternatives –

Our Pure Strategies

For institutional investors only
Harcourt Investment Consulting
Investors’ Insight
Content

3 Executive Summary
The quest for diversification and absolute returns

4 History
From the script to the creation of the Pure Strategies

5 Pure Strategies
The making of the Pure Strategies

6 Creating robust portfolios with Liquid Alternatives

8 How can you invest?

9 Conclusion
Cost-efficient, transparent and liquid

10 Management

Our Pure Strategies team

2   Liquid Alternatives
Executive Summary

The quest for diversification

and absolute returns

Since the outbreak of the financial crisis in 2008, the
world’s biggest central banks have flooded the financial
markets with liquidity, paving the way for the current
­market environment marked by low interest rates. As a
consequence, large investors such as insurance companies
and pension funds have found it increasingly difficult to
reach their investment goals and are looking for additional
ways to make good on their promises to clients 1. This has
involved a search for alternative risk premia – strategies
that can deliver suitable risk-adjusted returns by investing
in a range of uncorrelated asset classes.
Until recently, these highly sophisticated investment strate-
gies have only been available to a very limited circle of
“smart money” in­vestors such as hedge funds and univer-
sity endowments. While these strategy-related risk premia
have generated substantial above-average returns since
the early 1990s, they have come at a considerable cost in
the form of high fees, a lack of transparency and illiquidity.
The ensuing ­significant changes in the product landscape
have set the stage for so-called “liquid alternative strate-
gies”. These formerly exclusive strategies are now widely
available as regulated mutual investment funds with all their
associated benefits, resulting in additional investment
oppor­tunities for institutional and private investors alike.
Our Pure Strategies – your benefits at a glance
We offer access to absolute “hedge-fund-style” re­
turns while being significantly more cost-efficient,
offering full transparency under the UCITS IV frame­
work with daily liquidity/NAV data.
Our investment philosophy is based on our syste­m-
atic, well-researched and rules-based investment
approach.
We focus on robust, liquid alternative strategies
that perform well in different market environments
and provide downside protection during times of
crisis due to proven diversification benefits.
Strategy-specific, “pure” risk premia are comple­
mentary to traditional risk premia from equities and
bonds, for example, thereby enhancing a portfolio’s
overall risk-return profile.
Four dedicated portfolio managers with a combined
investment experience of nearly 60 years, proven
track records, and four European Hedge Fund Review
(HFR) performance awards.

Our liquid alternative strategies open up access to alternative risk premia which have previously only been avail-
able to some of the most sophisticated “smart money” investors. Furthermore, we can offer exposure through a
systematic investment approach within a regulated UCITS IV mutual fund structure.

1
Euromoney (2013): Insight – Financial repression hits pension funds, heaping on liability risks.

Liquid Alternatives    3
History
From the script to the creation of
the Pure Strategies
In 1952, Harry Markowitz’s seminal paper “Portfolio Selec-
tion”2 marked the financial industry’s academic ­starting
point for the concept of diversification, providing the prin-
cipal blueprint for protecting portfolios against large
drawdowns for decades. However, the stock-market crash
in 1987 and the bursting of the “IT bubble” at the turn
of the millennium highlighted serious practical flaws in this
widely-held concept, as several usually only slightly corre-
lated (or even uncorrelated) asset classes suddenly declined
in unison. Investors who had relied on protection through
diversification were left sitting with heavy losses. Conse-
quently, the concept of diversification was broadened to
include various developed and emerging markets. How­
ever, it took the financial crisis of 2008 to spur investors
into seriously looking for alternative ways to improve their
risk-reward ratios.
Until then, these investment approaches were only familiar
to the most sophisticated “smart money” investors, par­
ticularly university endowments, large private foundations,
and well-known hedge funds (see chart 1). Alterna­tive risk
premia, as opposed to traditional risk premia that stem from
individual asset classes such as equities and bonds, are de-
rived from investment strategies backed by solid ­academic
research, aiming at above-average, risk-adjusted returns
Chart 1: Liquid Alternatives as a replacement for hedge funds
Verifiable prices Examples
Highly liquid, exchange-traded assets,
daily pricing
Non exchange-traded assets,
monthly pricing
2
Markowitz, Harry M. (1952): Portfolio Selection, The Journal of Finance, Vol. 7, No. 1, pp. 77–91.
3
Rouwenhorst, K. Geert (2014): The origins of mutual funds, Yale ICF Working Paper No. 04–48.
4
McKinsey & Company, Financial Services Practice (2014): The Trillion-Dollar Convergence: Capturing the Next Wave of Growth in Alternative Investments.
5
SEI (2013): The Retail Phenomenon: What enterprising private fund managers need to know.
4   Liquid Alternatives
over a risk-free rate. Offered through hedge-fund struc­-
tures, these products promised excess returns, or “alpha”
in market speak, but often came at a high price in the form
of ­elevated fees, low transparency and almost no regula-
tion. Additio­nally, many hedge funds were structured with
long lock-up and notice periods leading to illiquidity.
Increased investor demand for alternative investment strat-
egies have paved the way for the introduction of “liquid
­alternative strategies” or so-called ’40 Act Funds 3 in the
USA. These funds owe their name to the Investment Com-
pany Act of 1940, introduced after the crash of 1929 and
the ensuing Great Depression. The initial goal was to boost
investors’ confidence in US mutual funds by setting clear
standards for investment companies – a framework govern-
ing the mutual-funds industry to this day. ’40 Act Funds,
while employing very similar strategies as hedge funds,
manage to do so with all the advantages of tradi­tional
­mutual investment funds. Against this background, well-
known consultancies and service providers in the ­financial
industry such as McKinsey 4 and SEI 5 have forecast a rapid
increase in the size of assets under management and the
available number of mutual investment funds up to 2020.
At Vontobel, we have developed three types of liquid alter­
native strategies, which we call Pure Strategies.
Managed Futures/CTAs
Global Macro
Long/Short Equity
Equity Market Neutral Liquid Alternatives can be
viewed as a substitute for
hedge funds
Non-traditional Bond
Event Driven: Merger Arbitrage
Relative Value
Event Driven: Distressed Securities
Private Equity
Real Estate
Pure Strategies

Finally putting it all together –

The making of the Pure Strategies

In 1997, William Fung and David Hsieh put forward the
idea that risk and return characteristics can be structured
dependent on trading strategies rather than on the se­
lection of asset classes 6. In developing our Pure Strategies
we have performed extensive research on over 20 diffe-
rent strategy-specific risk premia. Through this empirical
research we have identified three strategies that yield
the most attractive and ­robust returns in benign market
regimes as well as during periods of stress. These are mo-
mentum, value and volatility. As chart 2 shows, these
three strategies fulfil our two main criteria − diversification
Chart 2: All strategies meet our two main criteria
High
Momentum
Illiquidity
Volatility*
Diversification
and robustness − particularly well. Other prominent and
widely employed approaches such as merger and convert-
ible arbitrage or foreign-exchange carry fail to do so on
one or several counts.
The term “pure strategies” means that each individual
strategy aims to capture the essence of the specific in­­-
vestment concept while simultaneously hedging against
­systematic market or so-called “beta” risk. Moreover,
each strategy invests in a variety of different markets and
underlying instruments globally to enable us to move in
a well-diversified investment universe while keeping the
corre­lation with generally employed hedge-fund stra-
tegies low. Investors thus gain access to attractive and ­­
u­n­ique risk-return profiles with downside protection. In the
Hedge Fund Research (HFR) universe, Pure Momentum
is classified as Macro: Systematic Diversified, Pure Divi-
dend as Equity Hedge: Fundamental Value, and Pure Pre-

FX Carry Value
mium as Relative Value: Volatility.

Convertible
Arbitrage The following overview (see charts on page 7) provides
a detailed description of each of the three strategies and
Merger
Arbitrage their payoff profiles. In these charts, the horizontal axis
Low denotes the price development of the underlying market,
Low Robustness in Periods of Stress High while the vertical axis shows the respective gain (section
above the horizontal axis) or loss (section below the hori-
* Tail risk-hedged volatility strategy
zontal axis) of the strategy at a given price level.

6
Fung, William/Hsieh, David A. (1997): Empirical Characteristics of Dynamic Hedging Strategies: The Case of Hedge Funds, Review of Financial Studies 10.

Liquid Alternatives    5
Pure Strategies
Creating robust portfolios
with Liquid Alternatives
Pure Momentum – systematically exploiting both
upward and d ­ ownward trends
This strategy is designed to benefit from two types of mo-
mentum in the global financial markets. “Time series mo-
mentum” reflects risk premia arising from a systematic
participation in strong medium-term uptrends as well as
in downtrends (usually between 20 days and 12 months).
It involves investing globally in about 40 of the most liq-
uid ­financial instruments such as widely-traded equity,
fixed-income, and currency futures. This first sub-strate-
gy of Pure Momentum will tend to perform best in mar-
kets with strong price trends, either positive or negative.
In sideways markets with frequent, short-lived trends, the
so-called “whipsaw effect” sets in, resulting in a number
of break-even trades or minor losses.
This can be offset by the ­second sub-strategy called
“cross-sectional momentum”, which is used to systemati-
cally identify stocks that show persistent relative funda-
mental strength compared with their domestic markets.
Under this sub-strategy, we take long positions in a bas-
ket of stocks leveraging our in-house emerging-markets
expertise. Any outperformance relative to the respective
index will be locked in by hedging against general market
and currency risk through short index and currency fu-
tures or forward contracts. In sum, our Pure Momentum
strategy is unique in the investment landscape in that it
combines two nearly uncorrelated sub-strategies. It can
deliver additional diversification benefits with signi­ficant
upside potential in positive and negative-return environ-
ments, providing protection to investors with a “long”
bias. The corresponding payoff diagram in chart 3 is
­referred to as a “long straddle” profile.
Pure Dividend – “quality” dividend stocks with
dynamic beta hedge
This strategy is designed to profit from regularly earned
dividends and focuses on “high-quality” stocks of com­
panies with a strong dividend history, stable earnings,
cash flows, and solid balance sheets. It systematically
­selects stocks in the global equity markets with a focus
on maximising dividend income. In the current low-yield
environment, dividend income can pass for a higher-­
yielding substitute for regularly earned interest payments
from a typical fixed-­income fund, replacing duration and
credit risk by tightly controlled equity market risk. The
long equity ­holdings are then balanced by a short position
6   Liquid Alternatives
in corresponding equity indices in order to extract this
high-­quality dividend premium. This is achieved through
short futures positions and a proprietary downtrend model,
thereby lowering the portfolio’s exposure to general
­market risk. However, this short index exposure will be
flexed to allow some market beta in positive equity-return
environments. The payoff diagram in chart 4 shows the
well-known ­profile of a “long call”.
Pure Premium – collecting risk premia through dynamic
investment strategies
This strategy is designed to extract risk premia through
mainly two option-like sub-strategies: “traditional
­option” and “dynamic premium”. Academic studies
show that asset managers can build such strategies not
only by directly investing in the options markets but
also through traditional asset classes and their derivatives.
The combination of these strategies enhances fund
­diversification. The strategies will invest in global
­markets (North America, EU, Asia) and across asset
classes, for example equities, bonds, credit, foreign-­
exchange and derivatives markets. According to their
market views, our fund managers allocate the overall
risk budget ­between the two sub-strategies. The alloca-
tion to either strategy may temporarily be zero.
“Traditional option” deploys call and put options.
The sale of at-the-money options results in a so-called
“short straddle” payoff, that is a V-shaped profile turned
upside down with no initial downside protection. In order
to mitigate possible losses, risks are addressed through
buying options far below and far above the ­current mar-
ket price (out-of-the money). The resulting position is
short volatility with limited expected maximum loss. It
generates its strongest returns in sideways markets and
yields lower or negative returns in strong ­directional mar-
ket environments. The payoff diagram depicted in chart 5
on the next page shows a “butterfly” profile.
While “butterfly” structures entered during market phas-
es with high volatility can generate very attractive premia,
they may not be high enough to yield the target returns
in quiet markets. This can be mitigated by the second
sub-strategy, “dynamic premium”. It aims to ­extract risk
premia across the above markets and asset classes in
strong directional market environments. The payoff for
 this sub-strategy thus resembles the “long straddle” pro-
Chart 3: Pure Momentum – Payoff Long Straddle file in chart 3. Pure Premium therefore combines tradition-
al option premium generation with classic trend-following.
Profit Profit
The discretionary allocation ­between the two sub-stra­
tegies by our portfolio mana­gers delivers an “all weather
solution” for challenging market environments.

Combination of all three strategies leads to significant

Price falling Price rising ­dPrice falling
iversification benefits Price rising Price falling

The merits of each of the three strategies on a stand-alone

basis are plain to see: they boast a distinct payoff profile
Loss with limited downside, making Loss them complementary to
traditional portfolios with mainly equities and bonds. One
Collect risk premium Limited downside Limited downside Collect risk premium Limited dow
additional significant benefit, however, comes into play
when all three strategies are combined to form a mixed
portfolio that offers the prospect of performing reasonably
well in almost any market environment. In addition, we be-
Chart 4: Pure Dividend – Payoff Long Call lieve the combination of all three strategies can provide the
advantage of substantial diversification benefits not only in
Profit Profit
terms of markets and instruments, but also with respect to
periods of both low and high market volatility. In general,
one can distinguish six market en­vironments: uptrends,
sideways markets, and downtrends, with each regime
showing either high or low levels of ­volatility. In a given
Price rising Price falling Price rising Price Price
fallingone or two strategies might lead to a flat
­regime, orrising
slightly
negative performance, which could be offset or often
overcompensated by the relatively strong performance of
Loss
Loss the remaining one or two strategies.

Limited downside Limited downside Collect risk premium Limited downside

Looking at equity Collect
markets riskfrom
premium
a trendperspective, for
example, Pure Momentum is designed to perform well in
either strong uptrends or downtrends, since the underly-
ing algorithm will alert the portfolio manager to go either
Chart 5: Pure Premium – Payoff Butterfly long or short. Pure Dividend will perform relatively well
in sideways markets and even better during uptrends,
Profit
­allowing the portfolio manager to achieve high dividend
­in­come and potentially additional price gains. Pure Premium
will perform slightly negatively in strong directional market
environments. In sum, investors can expect to benefit con-
siderably from strong uptrends, incur only moderate losses
Price rising Price falling Price rising
in stable markets, and profit reasonably from falling equity
markets. Looking at equities from a volatility perspective
with assumed low levels of volatility, investors can expect
Loss
to incur moderate losses in Pure Momentum, achieve a
flat to slightly positive performance in Pure Dividend, and
um Limited downside Collect risk premium
profit strongly in Pure Premium.

Liquid Alternatives    7
Pure Strategies

How can you invest?

Vontobel liquid alternative funds are managed by our
Harcourt specialists. In the European Union, they are
­regulated under the UCITS IV Directive, which ensures
a ­greater degree of safety with full transparency, high
levels of ­liquidity, and strict leverage limits.
Alternatively, institutional clients and high-net-worth in­
dividuals can also invest in an AIFMD structure. It is more
flexible than a UCITS fund and the weights of the indivi­
dual Pure Strategies in this structure can vary considerably
over time.

Vontobel Fund - Vontobel Fund - Vontobel Fund -

Pure Momentum Strategy Pure Dividend Strategy Pure Premium Strategy
Target LIBOR + 300 to + 500 LIBOR + 300 to + 500 LIBOR + 300 to + 500
basis points basis points basis points
Instruments Equities, Bonds, Futures, Equities, Bonds, Futures, Equities, Bonds, Derivatives,
FX Forwards* FX Forwards* Credits, FX Forwards*
Portfolio Manager Dr Jan Viebig, CFA Dr Martin Tschunko, CFA Paul Nicholson, CFA
Dr Martin Tschunko, CFA
Benchmark 3 months US dollar LIBOR 3 months US dollar LIBOR 3 months US dollar LIBOR
Fees 0.75 % Management Fee 0.75 % Management Fee 0.75 % Management Fee
(institutional) (institutional) (institutional)
10 % Performance Fee UCITS IV (Luxembourg) 10 % Performance Fee
UCITS IV (Luxembourg) UCITS IV (Luxembourg)
HFR Strategy Macro: Equity Hedge: Relative Value:
Classification Systematic Diversified Fundamental Value Volatility
ISIN LU0971938195 (USD-I) LU0971937205 (USD-I) LU0971938864 (USD-I)

* Additional instruments possible at a later stage

8   Liquid Alternatives
Conclusion
Cost-efficient, transparent and liquid
Since 2008, central banks’ unprecedented liquidity injec-
tions have restored trust in the financial system, yet they
have simultaneously led to ­additional challenges for inves-
tors and savers. This boost to liquidity has enabled markets
to shrug off fundamental ­economic data, thus leading to
­significant r­ eturns from traditional risk premia. Although
these benign conditions may continue for some time, va­
luations are likely to come under pressure at some stage,
and prudent i­n­vestors with a long-term focus should start
preparing themselves for this scenario. A diversified invest-
ment ­approach across different asset classes, combi­ning
robust “price-­agnostic” momentum strategies and fully
hedged dividend and option premium-generating strate-
gies, ­provides a cost-efficient, transparent, and flexible
solution to mitigate this risk – not only for sophisticated in-
vestors, but also for the investing public.
Liquid Alternatives    9
Management
Our Pure Strategies team
Portfolio Management
Dr Jan Viebig, CFA
Head of Alternative Investments
Lead PM of VF – Pure Momentum
Strategy
Head of Emerging-Markets Equities,
Credit Suisse
PM Long/Short-Equity and
Absolute Return, DWS
Dr Philipp Kallerhoff
PM Absolute Return Bond/
Liquid Alternatives
PM Equity and Fixed Income,
Centrade Capital Management
Quantitative Analyst Multi
Asset Class, Landesbank Berlin
Our team has 60 years of investment experience and has won four European Hedge Fund Review Performance Awards.
10   Liquid Alternatives
Dr Martin Tschunko, CFA
Head of Liquid Alternative Strategies
Lead PM of VF - Pure Dividend and
Co-PM of VF - Pure Premium Strategy
Quantitative Trader, focus on
volatility strategies, Man Group
PM Global Long/Short-Equity,
Deutsche Bank
Dr Matthias Kurmann
Analyst
Quantitative Analyst Private Equity,
Capital Dynamics
Quantitative Analyst,
Olympus Capital Management
Paul Nicholson, CFA
Lead PM of VF - Absolute Return Bond
and Co-PM of VF - Pure Premium
Strategy
PM Multi Asset Class,
SAIL Advisors Ltd.

PM Fixed Income, HSBC and Nomura
Risk Management
Thomas Carrier
Risk Management
Due Diligence Officer Europe,
Olympia Capital Management
Credit Analyst, JP Morgan
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Liquid Alternatives    11
Harcourt Investment Consulting AG
Gotthardstrasse 43, CH-8022 Zurich
Telephone +41 (0)58 283 62 00
info@harcourt.ch
www.harcourt.ch