Alternatives

After tremendous growth over more than a decade of strong returns, risk-parity strategies have recently been struggling. Has the market run-up exposed a fatal flaw? We don’t think so.

For the US and other developed economies right now, it’s “all quiet on the inflation front.” Perhaps too quiet. That’s why we believe it’s time to get real about inflation and the investing opportunities that may well develop in the next several years.

In a recent blog, Passive Management Does Not Equal Passive Investing, we showed how passively managed portfolios actually create an active investment in which volatility isn’t benign and risk exposures can vary wildly over time. So if we could fix the problem and reduce exposure to spikes in market volatility, would a passive portfolio deliver better result?

Commodity prices soared during the first decade of this century. But now the party’s over: new sources of supply are coming on line just as demand from China is slowing, leading to expectations of price declines. So should investors shun commodity-related investments?

Recent movements in asset prices suggest that markets have forsaken any possibility of an inflation outbreak in the next decade. We believe that view is far too sanguine.

By any name—Black Swan, three-standard-deviation event or negative tail event—the risk of unexpected heavy losses is a major concern for investors. The question is how best to protect against these low-probability, high-impact market moves.

When equity markets are buoyant and optimism abounds, fears of volatility tend to subside. But recent events in Japan remind us that euphoria itself can generate turbulence.

It felt like there was nowhere to hide from the market declines last Monday, April 15, when stocks, bonds and commodities fell in unison across the world, well before the Boston bombings that day. We believe that this failure of diversification was instigated by increasingly powerful multi-asset funds, many of which use leverage, which may have become a new source of systemic risk for investors.

Several prominent pension funds have slashed their commodity futures investments for delivering poor returns with higher volatility than usual, while failing to diversify equity exposures as expected, The Wall Street Journal recently reported. If inflation rises, they may regret it.

Our research suggests that a well-diversified allocation to hedge funds might improve portfolio returns, but their greatest benefit is the risk reduction that comes from their low correlation to stocks. Here’s why.

Hedge funds have historically generated higher returns than stocks with less volatility, but they also pose several significant risks that volatility alone doesn’t capture, our research suggests. That makes careful due diligence and diversification of managers crucial. 

In a recent article, I discussed the conclusions about hedge fund's historical returns and risk we reached after rooting out biases in the data available. Here's how we sought to eliminate those biases.

It’s easy to understand the allure of hedge funds—and the fear they inspire. After conducting rigorous research aimed at separating fact from hype, we have concluded that hedge funds historically have had an attractive risk/return profile.