Can Absolute Return Protect Against the Comeback of Volatility?

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Published on April 21, 2018

| 2 min read

Jim McHugh, Senior Managing Director, Business Development


I’ve recently noticed a change in the tenor of my conversations with CIO’s, public equity heads and risk managers, due primarily to increased market volatility. They all seem to be wondering how to best position themselves in light of market volatility. We’ve enjoyed a multi-year bull market that’s helped buoy funding ratios, but how do you preserve these gains?

It’s a valid concern. The commitment to equities is essential, of course, but volatility’s comeback has forced a keener eye on managing plan risk. Already, with just one quarter of higher equity market volatility we’ve seen U.S. corporate pension funding ratios dip in March.

Many of our clients are looking to absolute return strategies as a potential answer. This seems reasonable. These strategies often tout diversification, and reduce beta exposure and risk while improving risk-adjusted returns. Unfortunately, they all exhibit varying degrees of these benefits. Collectively, these features can produce different outcomes.

Figure 1
Risk-return characteristics of absolute return and other investments*
20-Year Period Ending December 31, 2017

Risk-return characteristics of absolute return and other investments*Data reflects past performance, which cannot guarantee future results.

Recognizing the challenges our clients face in preserving funding ratios, our Client Portfolio Management team recently wrote, “Can Absolute Return Protect Against the Comeback of Volatility?” In it, our team provides a framework for assessing the potential of absolute return strategies that is focused on outcomes: correlations, volatility and returns.

We explain practical use cases for absolute return strategies, and give insight into their use:

  • How to fund them
  • How to identify true sources of diversification
  • How to set your own return expectations

Have a look. I’d love to hear your feedback on the paper.

Equities For Absolute Return A White Paper discussing the importance of absolute return, its pitfalls, and potential. Read White Paper