Published by Bob Elliott on Sep 16, 2022 3:16:35 PM
Diversified alpha allocations should deliver pretty good returns (on par with the S&P 500) with lower volatility than index investing over the medium to long-term. During good times that means positive returns that are good, but not exceptional. In downturns that means limiting drawdowns. This year, an allocation to diversified alpha is working just as expected.
The Hedge Fund Index is down 4% for the year through August which is much better than most major asset classes. Hedge Funds did it by positioning well for an inflationary cycle tightening – defensively in equities, short duration, and long commodities. These funds’ ability to move nimbly long and short as conditions evolve gives them advantage over other index allocations in unusual cyclical conditions.
Sources: Bloomberg, Credit Suisse, Barclayhedge, HFRI, and Unlimited calculations.
The overall performance is a function of disparate outcomes across different strategies. Generally lower-beta strategies have outperformed this year like macro and managed futures, both of which are experiencing their best returns in decades. Higher beta strategies like Long/Short Equity and Emerging Markets have seen declines, but those declines have not been nearly as bad as the benchmark indexes showing these funds are also adding value in the downturn.
Sources: Bloomberg, Credit Suisse, Barclayhedge, HFRI, and Unlimited calculations.
At Unlimited we use machine learning to understand Hedge Fund positions in real time which allows us to understand what positions have led to Hedge Funds’ outperformance. At the start of the year, Hedge Funds in aggregate had started to tilt their positions toward those that would perform well in an inflationary cycle tightening – less duration and more commodities.
Sources: Bloomberg, Credit Suisse, Barclayhedge, HFRI, and Unlimited calculations. Portfolios shown are for illustrative purposes only and do not represent portfolios managed by Unlimited.
While these managers maintained some exposure to equities, they held much more defensive positions as well which is helping to limit the downward pressure from the broader equity market selloff. The chart below shows more detail about the recent positioning of Long/Short Equity managers. These managers are short growth and holding much more limited non-US positions relative to normal. In contrast, there are significant positions in value stocks.
Sources: Bloomberg, Credit Suisse, Barclayhedge, HFRI, and Unlimited calculations. Portfolios shown are for illustrative purposes only and do not represent portfolios managed by Unlimited.
It’s during times of stress that the outperformance of a diversified alpha allocation is critical to building a more stable portfolio. Unlimited’s return replication technology sees Hedge Fund managers’ positions in real time in order to replicate those returns in low cost index structures. Our goal is that every investor has the opportunity to benefit from Hedge Funds’ ability to provide cover in a storm.
For informational and educational purposes only and should not be construed as investment advice. The historical analysis discussed herein has been selected solely to provide information on the development of the research and investment process and style of Unlimited. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein.