In the last blog post of this series, we talked about how current market indicators are pointing to lower expected returns for multiple asset classes. To help solve these lower return expectations, we discussed lowering client expectations, increasing risk and incorporating alternatives into a portfolio, along with some other strategy suggestions. This post we will discuss the following topics: how much to incorporate in a portfolio, the comparison of returns over the longer term and the more recent time frame, and how much alternatives ‘cost’ investors.

Volatility has returned and if it seems like a jarring wake up; blame it perhaps on a market that lulled investors into a deep sleep.

By nearly any measure, stocks enjoyed one of their most tranquil periods in history between 2013 and 2017. A byproduct of the lullaby market is that many investors came out of it groggy and have been slow to react to the more normalized volatility regime that emerged last year. The good news: there’s still time to respond.

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.

In its 57-year history, the S&P 500 Index has become the center of the investment universe. In many cases, investors would be wise to resist its gravitational pull. Its ubiquity has also caused many investors and investment professionals to mistakenly apply the index as a mental benchmark for relative performance, even though the strategy it is compared with may invest in entirely different markets or securities.

Looking to win your office’s March Madness pool this year? Nothing busts a bracket quicker than letting behavioral biases guide the selection process. Use our 10-step tip sheet to remove behavioral biases from your own picks and perhaps capitalize on the biases of others.

Villanova over Georgetown in 1985, Bucknell over Kansas in 2005, and 16-seeded UMBC’s historic defeat over top-seeded Virginia last season…NCAA Tournament history is littered with unexpected upsets. It’s how March Madness got its name. If you’re trying to win a bracket challenge, we suggest you embrace the madness and call several upsets this year.

There are many parallels between sports and investing. Our recent blog raised the question as to whether LeBron James has lost focus since joining the Lakers and his comments about his team’s need to be more consistent. The blog raised some good questions about fund managers (e.g., do managers with historically good performance get a pass on future underperformance, etc.) and made us wonder if LeBron’s on-court performance has been consistent with year’s past.

Space Jam 2. HBO Show. Pizza shop. School for the underprivileged. English Premiere League partial team owner. Basketball legend. What doesn’t LeBron do?

The current market environment could give active managers a chance to shine, but absolute returns could throw shade on strong relative performance.

In our latest Wall Street Mood Monitor™, Chief Investment Officer John Riddle, highlights the decidedly negative sentiment on Wall Street as part of our three-factor model of revisions, earnings trends, and correlations. Here, we take a deeper look at revisions, specifically within the small cap universe.

In one of our recent posts, we discussed building portfolios that can handle the inevitable ups and downs that investors experience in the markets. Today we will discuss an important step in that process, namely, understanding the current market environment and setting go-forward expectations.

Imagine last September you placed a $500 wager on the Saints to win the Super Bowl this Sunday. Further imagine your heartbreak as a human error resulted in perhaps the worst no-call in the history of sports, thereby thwarting your chance to cash a $6500 ticket. The joy and agony we all experience from our sports obsessions often hinge on the mistakes, biases, and mis-cues of the all-too-human participants.

Market conditions were challenged with spiking correlations and negative sentiment presenting headwinds for stock pickers. Earnings trends were the only bright spot.

Did you know the average person in the U.S. spends nearly half a day interacting with media?* This mass consumption creates information overload for many, and it’s a trend we’ve heard a lot about from our advisor clients. Many of our clients noted that investors are coming into meetings having consumed a lot of data points on investments, and are confused about the statistical terms commonly used. To help alleviate this issue, we’ve created the 361 University of Alts Educational Series.

2018 was a strange year, and not just because Baby Shark was playing on constant loop, or because everyone became mildly obsessed with a Netflix movie heavy on blindfolds during the holidays. As far as markets go, it was one of the only two years since 2009 that a multi-factor portfolio delivered a negative return. Global multi-factor portfolios have been positive 8 out of 10 years, including 2011 and 2015 when the MSCI World was negative. 2018 was the only year in the last decade that multi factor portfolios and stocks broadly were down at the same time.

The return of volatility this year has brought opportunity—the opportunity to tactically increase allocations to an oversold asset class. This selloff has advisors and clients discussing how to nimbly take advantage if another correction looms. Before eyeing that entry point into a riskier asset class, however, advisors face a conundrum: How can they add a riskier — albeit attractively valued — asset class without upsetting the portfolio’s long-term risk profile?

You may or may not recognize this photo; it was taken after Hurricane Michael hit Florida in October of this year. After the storm, a picture of this house kept appearing in various news articles because it was one of the only homes still standing in the hardest hit area—Mexico Beach, Florida.

After a somewhat calm third quarter, October and November have been rattled by 24 changes of at least 1% up or down in the S&P 500 Index. (For reference there was not a single 1% move up or down during the third quarter.) This uncertainty once again reminds advisors and investors that they should consider shifting their portfolios from participation mode to preservation mode.

The holiday season is upon us, and with that, many of us will be hitting the out of office button for a break. Whether you are heading to the airport for a holiday trip or having a stay-cation, it’s a good time to do some holiday reading. So, we asked our 361 team for some recommendations to add to your shopping cart.

The intent is always good, but sometimes it comes with unintended consequences, this is the lesson from the well-known Cobra Effect. Dating back to the British rule of colonial India, the British government tried to reduce the number of venomous cobra snakes in the country by offering a bounty for every dead cobra. While their intentions were positive, their efforts backfired, when people began breeding cobra to collect a bounty later. When the program sponsors got wind of this, the program was canceled causing breeders and would-be bounty collectors to release their snakes further increasing the cobra population.

“It was almost like being caught in an earthquake where you’re half in shock. There’s a sense of incredible disbelief.”

For some readers, that quote may ring true for various times throughout the history of the market, but for me, it refers to October 19, 1987…also known as Black Monday.

Domestic equity markets have not performed well in October. Through Monday October 29, the S&P 500 Index is down 9.36%, and the smaller-capitalized Russell 2000 Index is down 12.92%, on a price return basis. These declines have occurred against the backdrop of what appears to be—at least on the surface—a strong third quarter earnings season.

The Fall has ushered in both unpredictable weather and unpredictable volatility. While protection from adverse market events is best if in place prior to volatility spikes, it’s not too late to batten down the hatches.

Consecutive quarters of record-breaking earnings strength haven’t improved the mood among Wall Street analysts. That negative sentiment spoiled an otherwise healthy backdrop for active managers in the third quarter.

We’ve been expecting interest rates to continue to rise for quite some time as the Fed shifts away from their quantitative easing policy. However, markets have recently been spooked by Fed Chair Powell’s comments last week that “we’re a long way from neutral at this point, probably” indicating that additional rate hikes are coming. Rising interest rates can be scary, but there are some treats to be found if you look carefully.

Our favorite reads of the week and the quotes that make them worthy…

“Yes, black swans exist, but, like the actual bird, never forget: most swans are white.”

In a previous post, we discussed how the interactions between security analysts and the companies they follow often lead to a biased measure of consensus expectations. Here, we focus on what the term consensus implies, what it does not explain, and how it relates to earnings surprises.

Our favorite reads of the week and the quotes that make them worthy…

“In the end, we cannot control our luck—good or bad—but we can control our effort and preparation.”

We recently sat down with Harin de Silva, Ph.D., CFA, President and Portfolio Manager at Analytic Investors, sub-advisor of the 361 Long/Short Equity strategies, to discuss low-volatility equity investing. Specifically, why a dynamic approach to investing is necessary given potential fluctuations in factors that can be present in global equity markets.

Our favorite reads of the week and the quotes that make them worthy…

“Worse, many investors—individuals and professionals alike—take their own current emotions as indicators of the market’s future moves.”

361 Capital was very proud to sponsor and organize the 2018 9/11 Heroes Run this past Sunday benefiting the Travis Manion Foundation (TMF). Travis Manion was a Marine who lost his life in the war against terrorism. The Travis Manion Foundation helps veterans, families, and communities through various character building, mentorship, and empowerment programs.

It’s football season—and we’re excited to cheer on our hometown Denver Broncos. As we’ve all observed in the August preseason games, NFL coaches have been testing their teams and making roster changes to ensure that they have the best offense and strongest defense on the field when the regular season begins. Investors should be doing the same and evaluating their portfolios so they’re ready for whatever conditions lie ahead.

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.

We have all heard of the virtues of portfolio diversification, learned about them in school, and have Markowitz’s quote (“the only free lunch in finance”) tattooed on us. But since 2010, in one of the strongest bull markets ever (we can debate when a bull market starts at a later time), does it still make sense to diversify your portfolio?

Morningstar recently published a paper titled “Liquid Alternatives Have Yet to Prove They Belong in Portfolios.” We have concerns with the analysis on multiple levels.

In a recent piece, KKR’s Henry McVey said the following:

“Simply stated, we don’t want to own long-duration government bonds when governments around the world have shifted their tool kits from monetary stimulus to fiscal…

Like a popular diet plan, the term “risk-budgeting” is often discussed, and generally understood, but rarely followed in practice, it seems. However, just as Father Time will wield his will on all of our metabolisms, the markets will not be as forgiving at some point in the future…maybe even soon.

Earnings season is in full swing. This is the time each quarter when analysts and investors hear from company management regarding the past three months and gauge what that means for the future. Stock prices move based on how the company’s performance is viewed against what was expected. How financial results are judged relative to expectations provides insight into a behavioral anomaly that permeates the market.

Companies are shattering earnings expectations at a record clip…but Wall Street analysts appear skeptical the trend can continue.

As temperatures rise, sticky popsicle hands grapple for their pool towels and the markets continue to fluctuate like the ocean waves, now may be a great time to refresh your alternatives knowledge.

I’m going to start with the assumption that if the title of this blog caught your eye, you probably already allocate to one or more long/short equity managers. And with that, I’m going to skip over the general arguments for long/short equity strategies, except to say that if you do use long/short equity, it is likely in part due to where we sit in the market cycle in terms of valuations (high), interest rates (low and rising), margin levels (high and likely to be falling), and Fed policy (it’s becoming less accommodative).

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.

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.

In his most recent missive, “Investing Without People”, Oaktree’s Howard Marks takes on quantitative investing. We look forward to reading Mr. Marks’ memos, as they are packed with valuable insights from a venerable career. But in this case, the questions he poses are all too familiar & in my opinion, exhibits faulty logic.

For the next month, the global financial markets will take a back seat while trading desk monitors test their green hues. Knowing where interests will be focused, we created our own World Cup Challenge & while I won’t be able to win, I made my own picks…

Summer is upon us, and with that, many of us will be hitting the out of office button for a mid-year break. Whether you are heading to the beach with your family or having a stay-cation, it’s a good time to do some summer reading. So, we asked our 361 team for some recommendations to add to your shopping cart.

In January, we discussed how analyst sentiment was at a six-year high as of the end of 2017. Here, we take a look at the small cap universe and see if that feeling has endured, or if analysts have reined in their expectations.