On February 23, 2018, T. Rowe Price launched Multi-Strategy Total Return (TMSRX / TMSSX) which combines six liquid-alt strategies in a single package. These multi-strategy or multi-alternative funds function in the way that hedged funds were originally envisioned to: they combine strategies whose returns are not dependent on the movements of the broad equity and bond markets and, ideally, are not correlated with each other. The goal is to produce the potential for reasonable returns in a wide variety of hostile market conditions.
The fund is managed by Richard de los Reyes and Stefan Hubrich. Mr. de los Reyes joined T. Rowe Price in 2006. Dr. Hubrich joined them in 2005 and is an associate portfolio manager for the five-star T. Rowe Price Global Allocation Fund (RPGAX). He is also one of TRP’s Directors of Research in the Multi Asset Division. This fund is Mr. de los Reyes’ sole focus and Mr. Hubrich’s primary one.
The fund has six component strategies, with Messrs de los Reyes and Hubrich managing some of them and coordinating all of them. The strategies and their primary managers are:
Macro and absolute return: this is the go anywhere, invest in any asset, “best ideas” part of the strategy. It’s overseen byRick de los Reyes and three analysts.
Fixed income absolute return: this is a go anywhere in the fixed-income universe in search of positive returns, which means it will give up some of the upside to eliminate the downside. Arif Husain, who manages T. Rowe Price Dynamic Global Bond Fund (RPIEX) oversees investments here.
Equity research long/short: a global, large cap long/short portfolio overseen by Stefan Hubrich.
Style premia: I have yet to find a short, coherent explanation of a style premia strategy, despite the fact that it clearly and consistently works a market-neutral source of alpha. (If any of our readers can volunteer a sentence or two that would make sense to the average non-technical reader, we’d happily edit this Alert to include it). In any case, Stefan Hubrich will handle it.
I originally admitted that I didn’t have a clear explanation for style premia and solicited reader assistance with the explanation. Greg Stalsberg, CIO for the Ryan Financial Group shared this gloss on the strategy: “Style premia strategies attempt to profit from certain exposures or ‘styles’ that tend to be successful over time (e.g. value, momentum, low volatility). Many style premia strategies tend to be market neutral (for every dollar of long exposure, they also have a dollar of short exposure). As such, a simplistic strategy incorporating the three styles above would consist of three separate ‘trade bundles’: long $1 of cheap stocks, short $1 of expensive stocks; long $1 of high momentum stocks and short $1 of low momentum stocks; long $1 of low volatility/defensive stocks and short $1 of high volatility stocks. Since each style ‘bundle’ is market neutral, the bundles don’t tend to move in lockstep, which has historically led to attractive diversification benefits.” Greg later allows that it might take $1.20 long to match a $1.00 short because the shorts tend to be more volatile. We don’t claim this is exactly what T Rowe is doing, just that this is the sort of behavior that falls under “style premia.” Thanks to Mr. Stalsberg!
Quantitative equity long/short: Sudhir Nanda, described by the Financial Times as “a rising fund manager star,” is the head of the Quantitative Equity Group for T. Rowe Price. He manages five funds for them, all carrying the “QM” designation including the five-star, “silver” rated T. Rowe Price QM US Small-Cap Growth Equity (PRDSX).
Volatility relative value: an equity index call / put options strategy, which typically operate with negligible correlation to the market and robust returns when volatility is highest, managed Robert Harlow. Mr. Harlow is not responsible for any of the Price strategies per se but is responsible for options strategies within several asset allocation portfolios.
It is impossible to predict the fund’s prospects by looking at the performance of its peer group because the group is particularly random. We pulled the top 10 funds of the past five years based on their Sharpe ratios and looked for performance commonalities. There are none. When we looked at the correlations between those funds, they were mostly in the 60s and 70s with one true outlier (AQR Multi-Strategy whose correlation to the group was somewhere between negligible and negative). Oddly, their correlation with the S&P 500, in the 70s and 80s, was higher (AQR again excepted) than their correlation with one another, as was their correlation to their entire peer group. That implies that any eventual rating, whether Morningstar stars or Lipper Leaders, will be statistically unreliable; you’ll need to look beyond the headline to assess the fit of the strategy in your portfolio.
The folks at Price report that “MSTR targets a return of cash+5% with similar annualized volatility over a market cycle which translates to a Sharpe Ratio of 0.8 to 1.0.” Cash roughly translates to “the rate of inflation,” so you could conclude that the fund targets an annualized real return of 5%, give or take about 5% volatility. A Sharpe ratio of 1.0 would have it tied as the second-best multi-alternative fund over the past five years.
The fund gathered $53 million in its first month of operation. The investor share class has a $2500 minimum and 1.37% expenses, while the institutional shares require $1,000,000 and charge 1.07%. Morningstar describes both expense ratios as “high,” but Price has been exceptionally responsible in driving down fund expenses as asset growth permits.
Understandably, the fund’s homepage contains just the basic information for now.