Alternative strategies get some good press for being resilient in market downturns, but data from FE Analytics shows that, on average, they underperformed the S&P ASX 300 for the 12 months to 30 November 2018.
Natixis Investment Managers said alternatives strategies were in fact a disappointing area last year, predominantly due to advisers not taking advantage of strategies with the most diversification.
“There are many different strategies in alternatives, and advisers need to be aware of the behaviour of these strategies, which provide the most diversification, and when they work best,” said the firm.
“For example, equity long/short strategies can provide diversification to equity allocations, but being in reality more long than short, they will generally follow the direction of equity markets.”
On the other hand, according to Natixis, long/short managers that can take net short positions can make money in equity market downturns.
Data from FE Analytics shows the alternative sector returned, on average, -1.79 per cent for the 12 months to 30 November 2018, and while that’s a step up from the Australian equity sector, which returned -2.17 per cent, it’s still below the ASX 300 index, which returned -1.03 per cent.
But, while the index proved hard to beat, and alternatives may have not have shone that brightly, they were still more resilient to volatility than traditional asset classes.
The top alternative fund, the Macquarie P/E Global FX Alpha fund, returned 14.64 per cent, which is significantly more than the top Australian equity fund, the Lincoln Australian Growth fund, which returned 11.16 per cent.
Even the second best alternative fund, the Harvest Lane Asset Management Absolute Return fund sat above the top Australian equity fund with returns of 13.51 per cent.
So, it’s clear from the fund data that alternative strategies managed to hold their own in last year’s rocky market, but the experts said they still only contributed marginally to portfolio performance at best due to low allocations.
“In previous research we have shown that the most diversifying strategies are market neutral, managed futures (in trending markets), global macro and long volatility,” said the firm. “Many of these strategies did perform positively in 2018, but investors owned them either too little to make a difference, or not at all.”
The chart below tracks the performance of the alternative and Australian equity sectors as compared to the ASX 300 for the 12 months to 30 November 2018.