We’ve written extensively this year about building portfolios that can withstand multiple market conditions and how the next ten years may look very different than the last. While building the overall asset allocation is going to have the largest impact on your client’s ability to reach their investment goals over time, individual investment selection, particularly within alternatives, is a vital component of the overall success. The reason this is so critical in alternative categories is that dispersion is often much wider than in traditional asset classes.
After three months into 2019, the extreme volatility that occurred in 2018 might be easy to forget. However, it shouldn’t be so easily forgotten. Rather, it should underscore the importance of incorporating risk-mitigating strategies into your portfolio. As such, we have compiled some of our top long/short equity blogs to revisit the benefits of the strategy, and its critical place in a portfolio.
We’ve written in the past about the long/short equity category and how the recent performance of several of these strategies has a lot to do with the fact they have high beta relative to the category, and lots of leverage. Today, we wanted to write about something else that has been slowly affecting the way performance of the category has looked relatively, and becomes even more impactful when Q3 2018 comes to an end.
The market fireworks that started in February have continued well into June with the S&P 500 rising or falling greater than 1% for 39 days so far in 2018 (through June 30). And that’s more than double the number of days that experienced this movement in all of 2017.
After a somewhat rocky first quarter in equity markets, we saw an uptick of advisors searching for long/short equity strategies. We looked at some of the top performers in the category over the 3-year time frame and were surprised to see that some had outperformed the S&P 500 Index and/or MSCI World Index. This piqued our interest, so we decided to dig in.
It’s Masters week…one of the most historic and watched sporting events in the world. The game of golf is a complex sport. As I sit and watch these guys try to read every little nuance of the green (break, speed, grain, etc.) before hitting their putts, I’m reminded of the painstaking due diligence process investment professionals go through when selecting a manager.
February ushered in volatility like we’ve not seen in quite some time. And whether the first several days were merely a blip on an otherwise steady climb, or the signaling of a broad regime change, we don’t yet know.
Through December 7th, the global equity markets have advanced by 20% year-to-date, as measured by the MSCI World Index, and they’ve annualized at close to 14% since the end of the Great Financial Crisis. Taking risk in all of its forms has been amply rewarded, and it’s been easy to ignore strategies that can protect on the downside, like Long/Short Equity. But looking at individual fund results for the category, we find that many long/short equity funds have performed quite well this year, with the top performers coming close to, and in some cases exceeding, the performance of long-only equity strategies. Of course, the opposite is true as well, with bottom performers not only failing to keep up, but actually turning in negative returns. We suspect that is a result of trying to time the market and swinging to a net short position.
The table below reflects an interesting analysis from JPMorgan’s head quant Marko Kolanovic. It shows how exposed different investor groups are to equities, relative to their own histories. Unfortunately, it’s not clear how far back this data goes, but there were a few comments that helped to define the time frame. For example, looking at U.S. Households, Mr. Kolanovic says that they are now in the 94th percentile in terms of total equity exposure (meaning that equity exposure has been lower 94% of the time), and that this is above the levels seen in 2007, and only slightly below those of 2000, so we know the data goes back at least to the tech bubble. In any event, the question this raises, is if all types of investors are near their maximum equity allocations, what does that mean for future demand for equities?
After starting her career as an advisor, Andrea has been helping advisors implement financial products and strategies into their portfolios for more than a decade. Andrea is a CAIA charterholder and is well-versed in implementing and explaining alternative strategies.
The views expressed are those of the author at the time created. These views are subject to change at any time based on market and other conditions, and 361 Capital disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any 361 Capital portfolio.
This 361 Capital blog is not intended to provide investment advice. This blog should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by 361 Capital or any third-party. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.
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After starting her career as an advisor, Andrea has been helping advisors implement financial products and strategies into their portfolios for more than a decade. Andrea is a CAIA charterholder and is well-versed in implementing and explaining alternative strategies.