Lately we’ve fielded a lot of questions about fund fees. It seems both advisors and clients alike are finding fee disclosure confusing and there’s a lack of clarity around what investors are actually paying. This can become even more of a challenge for long/short equity funds.

Like so many others, 361 Capital employees began working from home in mid-March. Now that we are in week five, we thought it would be fun to share some of our staff’s experiences during quarantine. Below are our staff’s answers to what they are watching, what they are enjoying and what they are missing during this quarantine.

In a recent blog, we addressed the opportunity of funding a long/short equity position from existing fixed income holdings given the less-than-optimistic outlook for that segment of the market. I certainly agree that holding an overweight to core fixed income, at current interest rates and credit spreads, just doesn’t provide the same attractive risk/return trade-off that investors have gotten used to over the last 10 (20? … 30?!) years. Today, we offer a second approach to funding a long/short equity position.

The rapid spread and wide-felt human and economic impact of the novel coronavirus (COVID-19) have continued to roil global equity markets. The chart below plots factor performance since the market began pulling back on February 19. Low volatility continues to be the best-performing factor by a wide margin, with the majority of the other factors underperforming.

By the end of 2019, equity markets finished off an incredible decade with returns well above historical averages, and volatility well below them. Investors that had any kind of diversification or hedging in their portfolios were likely frustrated about lagging, long-only U.S. equities and may have gone either full beta or deployed ‘hedging strategies’ that had been performing well relative to the broader market (likely due to their higher beta). Now with the sharp decline that markets have experienced since February 19th, investors have perhaps been reminded why protecting capital on the downside is still so important.

As the world becomes increasingly concerned with the economic fallout related to the COVID-19 virus, global equity markets have sharply retreated. The chart below plots worldwide Google search activity for “coronavirus” relative to the performance of the MSCI World Index. Not surprisingly, the index performance is negatively correlated with the rise in searches for coronavirus, with the recent spike in searches inversely mirroring the steep drop in the MSCI World Index

Nearly two years ago, we wrote about the increasing beta we saw in many Long/Short Equity funds and the potential downside it could cause if markets were to stop their upward trajectory. At the time of that writing, we were smack in the middle of a record bull market run and it likely wasn’t a concern to many readers. A few months later, in late 2018 we did see some volatility, but by the time anyone noticed, markets shot higher (in early 2019) and strategies with higher beta continued to outperform those that were less sensitive to overall market movements.

Investors have enjoyed a record-long bull market in equity markets—with potentially many more periods of upward movement ahead. But, as this bull market stumbles and volatility increases, maintaining return sources and risk exposure beyond stocks and bonds seems increasingly prudent. Recent market turmoil further highlights why a best practice in portfolio construction includes varied return sources.

Like many of my co-workers, I listen to a lot of podcasts in my spare time. This one struck me as particularly interesting—so I thought I would recommend it.

Financial TV networks are filled with investors offering their insights into where markets will move in the future. Will there be a recession in 2020? Will the S&P hit new records? The reality is no one knows.

One of my least favorite things about prognosticators, whether it be sports, investments or Oscar favorites, is that when people make predictions, they only bring them up again when they are right. It is rare when people look back and say, “Wow, was I wrong. You definitely shouldn’t have listened to me.” Well, I’m not a prognosticator, but I am here to shake up that trend and grab my fork to eat some crow.

Tesla has been the Excalibur sword that active investors needed to fight the growing passive industry over the last four months. With the stock excluded from most indexes due to lack of profitability and float limitations, it has been one of the big market cap names that active investors could invest in for outperformance. While an investment in Tesla was problematic for active investors from 2014 thru 2019, the electric car maker has shifted gears in the last few months with over-weighted owners now rejoicing. Recent momentum in the name has lifted the stock 250% since October.

In the fourth quarter, the Health Care sector was the best performing group in the small cap benchmark, returning 22.3%, or more than double the Russell 2000 Index’s 9.9% return.

You’ve seen the news headlines lately, climate change concerns are hitting every industry including finance. At 361 Capital we too share these concerns about the environment, as does our subsidiary 361 Infrastructure Partners—a firm focused on innovative solutions that help public entities update failing essential service assets and realize the benefits of modernized, energy-efficient equipment.

We recently hosted a 2019 Market Review & 2020 Outlook with Blaine Rollins, CFA, author of our popular 361 Weekly Research Briefing. We had several interesting questions come in from attendees so we thought we would use this week’s blog to share Blaine’s responses.

As a student of the capital markets, I tend to group stock market events in memorable periods of time. An easy time frame to reflect upon is a decade and then working backward over the past century, ignoring detail and nuance. In other words, it’s easy to summarize each decade with only a few words.

During the 3^rd quarter, Morningstar reported that over $95 billion flowed out of active U.S. Equity strategies and into passive and semi-passive investment portfolios. Net funds have flowed out of active and into passive vehicles in 68 of the past 69 months, and as the chart below depicts, since 2008, over $3 trillion has flowed out of actively managed strategies and into passive vehicles.

We are days away from closing out the decade and what an incredible decade it has been for equity investors. Annual returns since 1957 for the S&P 500 Index averaged about 8%, with volatility around 15%; but since January 2010, equities have annualized at 13.3% with volatility at 12.5%. People often think of negative results when they think of black swans, but maybe this was an extremely positive one! Given this incredible result, I’m left questioning why to diversify at all—because clearly it didn’t do anything for you this decade.

As the holiday shopping season kicked into high gear with Black Friday and Cyber Monday, markets will be watching sales reports closely, especially with the fewest possible days between Thanksgiving and Christmas. So, we thought it would be interesting to focus in on some of the current trends in retail and take a look at what the stock market is seeing.

With winter approaching and the holiday season upon us, many of us will be leaving our offices behind for a mental break. Whether you are heading out on a holiday trip or having a stay-cation, it’s a good time to do some reading. So, we asked our 361 team for some recommendations to add to your shopping cart.

Managed futures have had a tough 10 years, but they gained much of their glory during the financial crisis as the category was up double digits in 2008 and stocks were down 30% or more. While there were investors who had been in the strategy prior, many joined after seeing that performance and decided to use it as a ‘hedge’ for their portfolio. While we hadn’t experienced any negative years for equities since 2009 (S&P 500 Index), 2018 came along and the long-awaited hedge provided by managed futures delivered what?

In a recent article, Morgan Stanley cautioned investors that returns on a traditional 60/40 portfolio “could slide to century lows over the next decade”. This warning highlights the importance of diversification in the traditional 60% stock/40% bond portfolio. While the algorithms underpinning managed futures strategies may be complex, the strategy’s purpose is simple. In a single word: diversification.

We often talk about factor returns as a single percentage, similar to a broad index return. The measures are helpful to get a quick understanding, but do not reveal much about the underlying dynamics. A factor’s return (also called a spread) is derived by the difference in returns of the top-ranked stocks and the bottom-ranked. This is done by quantizing the stocks into equal groups of similar rankings, based on a certain metric. Deciles, quintiles, or quartiles are popular to use. A decile spread is the average return of stocks in the top decile (D1) subtracted by the average return of stocks in the bottom decile (D10).

With economic outlooks shifting for 2020 with some saying recession, and others expecting continued growth, investors may be coming back to the question of how to position portfolios given uncertainty. To help guide portfolio decision making, forecasting expected returns for the market depends on a belief that either this record-setting 10-year bull market will continue, or that we may see a change in markets over the next year. To illustrate the importance of changing up the bet, we have a few simple questions that can illuminate a path.

Ten years have now passed since the stock market bottomed in 2009 and since then U.S. equities have annualized at between 17.38% for large companies and 17.68% for mid-sized companies. These outsized gains, along with the fading memory of 2009, have made it increasingly difficult to maintain a diversified portfolio.

Even though the long-term goal of investors is often capital preservation, fear of missing out—or FOMO—is leading many to ask why alternatives are part of a portfolio when stocks and bonds are marching ever higher.

The current bull market is the longest in history. So too, is the U.S. economic expansion. As those record-breaking streaks continue, it is hard for investors to remember that big losses can — and do — happen. It’s even harder to convince investors to prepare for them in advance.

Corporate earnings cool slightly and the mood on Wall Street is becoming more pessimistic. The 361 Capital Wall Street Mood Monitor assesses the climate for active management based on three factors: earnings trends, sentiment and correlations. The data behind those factors points to a mixed outlook for active managers.

What recently occurred in U.S. financial markets is nothing short of extraordinary when viewed through the lens of factor investing. While on the surface it appeared as if all were calm for the five trading days from September 4-September 10 with the S&P 500 Index rising by 2.56% and the Russell 2000 Index (small cap stocks) rising by almost 5%. Underlying this performance, however, were significant factor moves, at largely unseen levels of volatility, since the Great Financial Crisis in 2008-2009.

There is an unspoken tradition in finance where companies want to beat the expectations of the investment community and then raise the bar just enough to beat expectations over the next period. Companies that do this routinely, often get rewarded with a higher stock price. If we were to apply this idea to 361 Capital’s charitable side, this past weekend’s performance would be considered a “beat and raise” performance.

For stock pickers, especially those with a systematic approach, it has been a very difficult time. The constant change in sentiment is creating a great deal of uncertainty. It is challenging to find stocks that are expected to perform well in a given market environment when the market environment is so uncertain because it is changing more rapidly and unexpectedly. Laying the Twitter updates on top of what is already a unique environment puts investors in an unprecedented spot.

Over the past decade, one of the most undeniable investment trends has been the move toward passive equity products. The lower fees associated with index funds and a pretty good track record against active strategies in the most efficient markets has led many advisers to build their clients’ portfolios with passive equity strategies. But passive products’ success could be financial markets’ next undoing.

The podcast market has grown exponentially with one out of three people in the United States listening to at least one podcast in the last month. People are listening on their commutes, during their workouts, at the office and at home. So, we asked our 361 team for some recommendations and here is a list of our top picks.

The market’s recent sharp movements remind investors that the only certainty about future market direction is uncertainty. Stocks sold off in October (2018), dipped again in December, enjoyed their strongest January (2019) in 30 years and then worst day in 2019 on August 5^th. Whipsawing markets have alternately punished and rewarded both long-only strategies that benefit from a broad rise in stocks and alternative strategies that capitalize on market declines.

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.

Businesses delivered another quarter of strong earnings results but the mood on Wall Street remains glum; In June, analysts revised earnings estimates downward at the highest rate in more than three years.

If you are invested in managed futures, you know how difficult the past decade has been. Low interest rates, low volatility have led to very muted returns. However, it has not changed the historical profile of the strategy being additive as an uncorrelated component of an investor portfolio. But dispersion in the managed futures category is wide and could have made your experience much more tolerable or exceptionally painful. Here we’ll talk about the category and provide some things to consider as you are choosing a managed futures fund.

As an asset manager that specializes in alternatives, we receive a lot of questions from advisors on the subject. With uncertainty rising in the markets, now may be a great time to freshen up on your alternatives knowledge. Below are some frequently asked questions we’ve received from advisors on alternatives, along with some of our recent blog posts and other resources that may help provide answers.

The steady, upward trajectory of U.S. large-cap equities over the past decade has left many portfolios overexposed to the asset class. But rebalancing presents a conundrum: How can advisors decrease allocations to one of equity markets’ least-risky segments—and capitalize on more attractive valuations elsewhere—without upsetting a portfolio’s overall risk profile?

Congratulations to Gary Woodland for winning his first major championship on Sunday. What he showed us on Sunday was nothing short of daring, confident and determined. It was clear from his first tee shot, that Gary was there to WIN, and nothing else was an option. He took a stance, planted his flag firmly in the ground and was committed to his belief in himself. Too often in the investment world, there’s a temptation to chase hot money and we are intimidated to take a stance and plant our flag in the ground.

Given the current long-running bull market, with equities up over 15% annually and lower than historical levels of volatility, many advisors who allocated to alternative strategies post financial crisis have been frustrated. After many failed to deliver what people wanted in 2018, we’ve noticed advisors abandoning the space altogether. Given common behavioral biases, we certainly understand that sentiment, but on the other hand, we see larger institutions maintaining or in some cases even increasing their exposure. For example, a new report by Preqin, noted that 26% of institutional investors said they expect to commit more capital to hedged strategies in the next 12 months.

As alternative mutual funds proliferate, Morningstar faces a classification conundrum: How can single categories include funds with entirely different characteristics?

The question has deep implications for advisors, who will have to look beyond star ratings or past performance and get a deeper sense of an alternative strategy’s inner workings before deciding whether it matches a client’s objectives.