Given that a fundamental economic standpoint is clearly one of a high degree of risk and that traditional asset allocations have been heavily tied to equity market growth, now is not the good time to ignore alternatives, a Melbourne based investment manager, Cor Capital said.
While traditional 60/40 type portfolios could face significant risk as bond and equity correlations increase, this called for increased allocations to alternative strategies to improve risk adjusted outcomes, setting up a potential golden era for liquid alternatives focused upon absolute returns to improve investor outcomes.
Davin Hood, managing director at Cor Capital, said that larger institutions always used a wide range of potential tools to meet uncertain future including alternatives and portfolio hedging such as superfunds increasing their internal capabilities around derivatives, introducing long volatility allocations and utilising defensive option strategies.
But for retail investors and financial advisers, the menu of available solutions was relatively narrow, he said.
“This is understandable given the pre-requisites for daily liquidity, growing focus on passive SMA implementation and lower fees.
“The attraction of hedge funds and liquid alternatives is their ability to participate less or actively take advantage of negative market environments. This absolute return mindset should focus on the reduction of drawdowns to allow for the power of compounding of returns,” he said.
According to Hood, there were “all weather” multi-asset portfolios such as absolute return focused strategies that would fit into the liquid alternative bucket, or as a partial substitute for bonds, and as a core portfolio building block for risk adverse portfolios that avoided added complexity of many opaque hedge fund strategies which could be easily understood by investors- both large and small.
“These portfolios which are typically long-only multi-asset portfolios aim to perform within all potential market environments including recession/growth and inflationary/deflationary environments,” Hood said.
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