Alternative strategies are, in theory, supposed to provide an uncorrelated source of returns during times of market stress.
Well… did they?
One of the many criticisms levelled against absolute return funds and their ilk is the uncanny ability not to do as they’re told when you need them most.
Last week’s market rollercoaster provided the perfect stress test to pulse check how some of the more widely-held mandates in our database fared amid the turmoil.
Good news thenfor the four allocators who hold JPM Global Macro Opportunities, which returned 4.5 per cent in the month preceding August 9.
Similarly, Ruffer Diversified Return helped smoothen out some of the panic, returning over 3 per cent over the month, and this strategy is held by two allocators in our database – LGT and Casterbridge.
Other mandates such as Neuberger Berman Uncorrelated Strategies, Twenty Four Absolute Return Credit, and Lazard Rathmore Alternative all stayed largely flat or returned up to 1 per cent.
Though this can also be considered a success – given they didn’t follow the fate of the wider S&P 500, which dropped 5 per cent over the period.
Protecting cash in a downturn is a key benefit of these alternatives, although such security tends to come at a hefty price.
Indeed another complaint we tend to hear from allocators is how absolute return strategies continue to charge fees from a different era, but with a less compelling return profile.
Waverton admitted in a recent client note that CTA trend strategies, such as Dunn, have been weak in the initial reversal, as they broadly suffered from long yen positioning and certain long equity positions.
At the time of writing, their own Waverton Absolute Return fund had fallen around 70bps month-to-date.
“We have seen some weakness from both structured opportunities and absolute return strategies in aggregate, however the shift lower in short term rates has benefited the directly invested short-dated specialist fixed income portfolio,” said Bill Dinning, their chief investment officer.
But of course alts aren’t supposed to be the only diversifier to portfolios: indeed, a number of the DFMs we checked up on recently were far more impressed with how their fixed income holdings held up instead.
“Controversially, I would argue that given where bond rates are now and the risks markets are working through now is soft landing or recession, your fixed income positions will provide the protection for that and we saw that as bond yields in US government bonds fell as volatility spiked,” said Alex Funk, head of investments at Portfoliometrix.
Premier Miton is another DFM that’s pleased with its bond holdings at present.
“Encouragingly our Multi-Asset Absolute Return fund appears untroubled by recent market events, where the gains from our Treasury bonds, portfolio insurance protection, and our alternative positions, have helped offset any weakness from elsewhere,” wrote their head of multi-manager, Ian Rees.
