What We Do

What We Do

Currency Overlay

MPG offers Currency Overlay hedging.  

Foreign currency the second largest risk in the global institutional portfolios. 

In currency overlay, the active hedging positions are tailored to reduce the preexisting foreign currency exposures. The primary goal of active overlay is to reduce risk. Hence, we hedge back to the base currency when there is heightened downside risk in foreign currencies. This hedging reduces the large and unrewarded preexisting currency risk.

In a strict overlay hedging mandate, it is not permitted to increase the fund’s preexisting foreign currency risk, i.e. buy foreign currencies. Thus, when viewed in isolation, hedging can only add value when the base currency is strong. Over periods of base currency strength and weakness, there is the opportunity for the active overlay to add value. This is in addition to the major reduction in the unrewarded currency risk

Currency overlay hedging is complementary to currency alpha management. The primary goal of currency alpha is to seek return from currency trading. Due to its construction, a pure currency alpha program can provide little reduction in the fund’s total currency risk.

Equity Beta Hedging (EBH)

Based on our experience managing currency risk, we developed Equity Beta Hedging (EBH). This strategy is simple to understand: every day we measure the risk of large loss in S&P. When that measured risk hits a threshold, the portfolio is fully hedged by selling S&P futures. The hedging is binary. The hedge change is driven by the measured risk of large loss, not by price movement.

EBH has 3 objectives:

  • Primarily, to protect the equity portfolio
  • Secondarily, to capture equity return
  • Finally, to limit negative hedging cash flows

Value may be added if the portfolio is hedged in the small percentage of days when outsized equity losses occur. As a result, the average size of the hedging gains when the market falls can be far larger than the average size of the losses when the market rises. We believe EBH complements many other risk mitigation strategies because it exploits different information from those strategies, and, thus, may have a very different pattern of hedging.

Emerging Markets Equity

The Mountain Pacific Emerging Market equity strategy is based on the belief that capitalization-weighted indices are inefficient due to the high concentration in certain countries and companies. Additionally, we believe major inefficiencies exist in the pricing of risk between equity markets and the pricing of stock specific risk within individual markets. As a result, forecasting risk, not return, may provide a more consistent source of value add. We seek to reduce unrewarded risk and eliminate left-tail events, mitigating downside risk. This enables more consistent, risk-adjusted performance across varying market environments.

Our process is a quantitative encoding of our insights. Country factors consistently serve as the primary source of alpha and risk in emerging markets equity – so this is our primary focus. We estimate the country weighting to achieve the most efficient access to emerging market returns.

Our security analysis operates on the same basis: our starting point is to deselect securities which we believe have a high downside risk. We view stocks as being substantially fungible: hence, if there is perceived heightened downside risk in a stock, we try to replace that holding. Given the nature of emerging markets (poor transparency, weak corporate governance and political instability), we believe it is easier and more effective to identify bad companies and to cull them out of the universe of investable stocks than to try to identify a small number of potentially outperforming stocks.

In addition to quantitative models, we employ forward-looking macro judgments primarily related to political and economic risks.

Global ex-US Equity

The strategy exploits inefficiencies in the way risk is priced in the market. By identifying companies that have higher or lower risk, and adjusting exposure to them, we believe we can achieve more consistent risk-adjusted performance by avoiding the few most extremely negative outcomes.

Our strategy is primarily a quantitative approach focused on identifying and measuring fundamental company risk with infrequent qualitative overrides to the quantitative model’s recommendations.