A Lapse Worth Overlooking and a December Worth Cherishing?
In the final months of 2018, equity exposure was identified as the primary cause of losses in priced-based systems, with markets showing increased dispersion, directionality, and volatility across equities, credit spreads, rates, and commodities. This volatility, which returned to equity markets and other assets during the fall, led to differing opinions reflected in prices across various markets.
Jim Neumann, Partner and Chief Investment Officer at Sussex Partners, a UK-based firm advising institutions on hedge fund allocations, emphasises the need for a forward-looking view as markets are moving again. He recommends increasing exposure to strategies that have proven adaptable to a less bullish environment.
A carefully constructed, thoughtfully diversified basket of non-correlated strategies is advised, with a focus on those with less equity directional exposure. This approach is believed to remain problematic in the current market conditions. It's important to limit equity exposure within this basket, as predicting the direction correctly in the short term is quite difficult.
Trend Following systems, even those with thoughtful entry/exit points and risk control, did not protect portfolios as intended during October and November. For the holiday goal, positions should be tweaked to focus on those with less equity directional exposure.
Despite the market downturn in October coming as a surprise to many hedge fund managers, despite some preparation for the end of the bull market rally, the value of hedge fund diversification and non-correlation in volatile markets is undeniable. Portfolio shifts into a more protective stance fared better but generally did not produce a positive return.
As the year-end approaches, the question for allocators and advisers is 'What now?' With the decision being whether to stay the course with non-correlated strategies like Trend Following into year-end and beyond, investors need to take action leading into 2019 to move some portion of their traditional or alternatives exposure into non-correlated protective strategies.
The author's views do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group. It's important to note that while there is a general point made about the value of hedge fund diversification and non-correlation in volatile markets, without direct evidence from Sussex Partners’ portfolios or results, more granular, verifiable data would be necessary for a comprehensive understanding of how specific hedge fund strategies—especially those constructed for market downturn protection—fared during the Fall 2018 downturn.
A December to Remember might yet be in the offing with these changes. As we move into the new year, it's crucial to stay vigilant and adaptable in our investment strategies.
Active management in finance is crucial during volatile times, as demonstrated by the market conditions in Fall 2018. Therefore, it's essential for investors to consider adopting non-correlated strategies that have less equity directional exposure, such as those recommended by Jim Neumann, to better manage risks and potentially improve returns.
