In our evolving financial landscape where generating alpha, managing risk, and maintaining capital efficiency have become increasingly critical, the key lies in our ability to adapt and adopt innovative strategies. These growing complexities have nudged us beyond the comfort zone of traditional investment avenues, challenging us to explore a more sophisticated and nuanced approach to portfolio management.
The Intech All Season Equity strategies embody this refined perspective, focusing on the integration of long and short futures contracts across various asset classes – equities, fixed income, commodities, and currencies – underpinned by a modest cash allocation from a long-only equity portfolio. The strategies seek to exploit the often-overlooked potential of implicit leverage within futures contracts, driving returns that greatly outweigh the capital utilized. In this blog, we dissect these intricacies, spotlighting how implicit leverage and futures contracts can be leveraged to optimize capital efficiency and create a resilient investment portfolio.
Venturing Beyond Equities: Synthesizing Futures
We recognize the pressing need for investment strategies that effectively handle systematic risk, provide performance convexity during tail risk events, and offer a steady flow of alpha. At Intech, our All Season Equity strategies are designed with these necessities in mind, setting aside a modest 5% of portfolio cash to collateralize futures contracts, optimizing returns and mitigating risk.
By synthesizing an equity portfolio with futures contracts, spanning four asset classes – equities, fixed income, commodities, and currencies – we integrate a more comprehensive view of the financial landscape. Each type of futures contract possesses unique benefits and risks, helping us navigate the broader economic waves that constantly reshape the financial markets.
Equity Futures Contracts provide a strategic tool for broad market exposure. Their inherent leverage can amplify returns in bullish markets without tying up significant capital, while short positions in these contracts offer a cushion during equity downturns, mitigating the risk of considerable losses.
Fixed Income Futures Contracts, on the other hand, allow investors to hedge against equity market downturns. Their typical negative correlation with equities provides opportunities for investors to profit from appreciating bond prices in declining equity markets. Short positions in these contracts serve as a balance against rising interest rates, ensuring stability in shifting economic climates.
Commodity Futures Contracts expose investors to diverse economic conditions, offering potential hedges against inflation and diversification benefits distinct from equities or bonds. The implicit leverage in these contracts can amplify returns during commodity price rallies, without necessitating considerable capital commitment.
Currency Futures Contracts offer a defense against currency risk and an avenue to expand beyond domestic markets. Implicit leverage in these contracts can enhance returns when predictions about future exchange rate directions prove accurate, offering downside protection during equity market downturns.
Leveraging Futures: A Macro Lens for Equity Portfolios
The potential power of integrating futures investing with an equity portfolio lies in the multitude of investment opportunities it unravels. It opens the window to broader macroeconomic events influencing financial markets, typically providing a source of uncorrelated returns and crisis alpha for the portfolio.
These macro events – changes in central bank policy, countercyclical economic conditions, inflation expectation shifts, cross-asset capital flows, severe equity sell-offs – impact various asset classes. Having the insight and agility to adapt your portfolio accordingly can be a powerful weapon in your arsenal of portfolio growth and preservation.
Futures contracts have the potential to allow investors to swiftly adapt to these macro changes. Thanks to their wide range, they can provide a broader perspective of financial markets than individual equities. This understanding allows us to position ourselves strategically ahead of macro events, taking long positions when markets are expected to rise and short positions when a downturn is anticipated. Adding futures to an equity portfolio can also offer uncorrelated returns and serve as a potential hedge during severe equity sell-offs, enhancing portfolio resilience and return potential.
Unlocking Capital Efficiency through Leverage
In a challenging financial climate where traditional avenues for return enhancement often find themselves stretched to their limits, achieving capital efficiency has become an indispensable part of investment strategy. In this context, the importance of futures contracts and the leverage they offer is pronounced.
Futures contracts are essentially agreements to buy or sell an underlying asset at a predetermined price at a future date. This allows for exposure to a wide range of asset classes without the need for significant upfront capital – a feature that serves to enhance capital efficiency. In essence, the investor can access larger positions than what their capital would usually permit, which, if managed carefully, becomes an instrument for potentially enhancing returns and managing risk.
Picture futures contracts as a “financial magnifying glass.” They have the potential to amplify a small investment, increasing its influence on a portfolio’s overall performance. This leverage capacity doesn’t require a large outlay of capital. Instead, it uses a modest portion of the portfolio as collateral. For instance, in the case of Intech All Season Equity strategies, we employ just 5% of the portfolio.
Let’s put this into practice using a hypothetical scenario.
Consider an equity portfolio of $100 million. From this, we dedicate a small fraction – 5% or $5 million – to futures contracts. Through the power of implicit leverage, this $5 million can give us exposure equivalent to a much larger sum, say $100 million. This is called the notional value. Despite only committing a fraction of our total portfolio, we can potentially drive returns as if we had invested a significantly larger amount.
Let’s assume that due to well-strategized trades, the futures segment of the hypothetical portfolio generates a return of 3%. Given our leveraged position, this 3% return on the $100 million exposure would equate to a gain of $3 million. Now, assume the equity-only component generates $4 million in return, or 4.2%. The total hypothetical portfolio return is 7% — great in a low-return environment – but the futures contributed about 40% to that return.
However, it’s equally crucial to remember that the leverage provided by futures contracts is a double-edged sword – it can significantly amplify losses in addition to gains. In our example, if the equity market were to decline, the investor could face losses in their futures position. Indeed, outside our example, an investor could lose more than their original investment in the worst case scenario. Such risk underscores the necessity for rigorous risk management when integrating futures into an investment strategy, a critical aspect we incorporate in our Intech All Season Equity strategies. Intech All Season Equity strategies’ futures position is fully collateralized by a cash position and the investor is protected from losing more than their original investment. What’s more, the strategy constrains the total volatility of the futures component to just 5%, further aiming to contain potential losses.
Intech All Season Equity strategies’ futures position is fully collateralized by a cash position and the investor is protected from losing more than their original investment.
Understanding and harnessing the power of implicit leverage within futures contracts allows investors to enjoy the benefits of larger market exposure while committing to a smaller upfront investment. It’s why futures can contribute and detract to portfolio returns more than their modest allocations would suggest. Magnified gains must be balanced against the possibility of magnified losses. At Intech, we believe that careful management of this balance is the key to utilizing the power of implicit leverage effectively and creating a more resilient portfolio. This principle of balance, of capital efficiency with risk management, is central to our Intech All Season Equity strategies and our commitment to delivering resilient alpha in various market conditions.
Conclusion
In the ever-evolving financial landscape, relying solely on traditional equity investments falls short. Investors who are seeking to enhance capital efficiency, guard against systematic risks, and generate sustainable alpha may want to consider investment strategies like those offered by Intech All Season Equity.
These strategies strive to accomplish these objectives by harnessing the potential of diversified futures contracts, with a lean collateralization of 5% cash from a long-only equity portfolio. We’re excited about this comprehensive approach, merging the upside potential of equities with the diversified scope of futures contracts and their inherent leverage. These strategies offer a potential way to mitigate risk in volatile markets while opening new avenues for alpha generation.
At Intech, we believe that our All Season Equity strategies provide a toolkit for institutional investors seeking to navigate today’s unpredictable markets. Our commitment to investment innovation drives us to redefine boundaries, offering solutions that potentially enable investors to navigate in an ever-evolving investment landscape.
For U.S. Investors:
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance is no guarantee of future results. Investing involves risk, including fluctuation in value, the possible loss of principal, and total loss of investment. Information containing any historical information, data, or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional and professional investors, Qualified Purchasers, Qualified Institutional Buyers (QIB), Qualified Eligible Persons (QEP), Accredited Investors, and pension consultants who have the resources and financial expertise to understand the risks and limitations of such strategy.
There is no performance guarantee associated with investing in any strategy. There can be no assurance that the objectives associated with any strategy will be met or that any investor will or is likely to achieve the stated investment objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
The hypothetical illustration does not represent the returns of any particular investment.
An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
This presentation or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
For Europe Investors – Important Information:
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. There is no performance guarantee associated with investing in any strategy. There can be no assurance that the objectives associated with any strategy will be met.
There is no performance guarantee associated with investing in any strategy. There can be no assurance that the objectives associated with any strategy will be met or that any investor will or is likely to achieve the stated investment objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
Past performance does not predict future returns. Marketing communication. The value of an investment and the income from it can fall as well as rise and investors may not get back the amount originally invested. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell, purchase or hold any investment.
The hypothetical illustration does not represent the returns of any particular investment.
There is no assurance that the investment process will consistently lead to successful investing.
Various account minimums or other eligibility qualifications apply depending on the investment strategy, vehicle or investor jurisdiction. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Investment management services may be provided together with participating affiliates in other regions.
Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.
For Australian Investors:
This information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information you represent that you are a wholesale client.
The views presented are for general informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund. Nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. The views are subject to change at any time based upon market or other conditions, are current as of the date indicated, and may be superseded by subsequent market events or other conditions. The information, analyses and/or opinions expressed are for general information only, and are not intended to provide any specific financial, economic, tax, legal, investment advice, or recommendations for any investor. It should not relied on as the sole basis for investment decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained in this report. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance is no guarantee of future results. Investing involves risk, including fluctuation in value, the possible loss of principal, and total loss of investment. Information containing any historical information, data, or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction.
There are inherent risks associated with investing in securities markets. Investing in securities involves risk of loss that investors should be prepared to bear. The risks will vary based on the nature and attributes of the investment strategy and the specific securities and other instruments held. Investing in futures is speculative, involves substantial risk, and is not suitable for all investors, and is intended solely for the use the use of institutional investors, consultants, and other professionally recognized financial intermediaries in Australia and not for general public distribution. There is no performance guarantee associated with investing in any strategy. There can be no assurance that the objectives associated with any strategy will be met.
There is no performance guarantee associated with investing in any strategy. There can be no assurance that the objectives associated with any strategy will be met or that any investor will or is likely to achieve the stated investment objectives, generate profits, or avoid losses. There are numerous risk factors related to the market in general or to the implementation of any investment strategy, all of which should be carefully considered before investing.
The hypothetical illustration does not represent the returns of any particular investment.
An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
This presentation or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.
