Navigating the financial markets is like sailing on a vast, unpredictable ocean. The waves represent the ever-changing market dynamics, and the wind propelling us forward is the alpha we strive to capture. However, the increasing frequency of regime changes, driven by macroeconomic forces, has made the journey more challenging. Public equities, while a staple in many investment portfolios, can sometimes leave us exposed to these macroeconomic factors. This exposure can be a boon in favorable conditions, but it can also overshadow excess returns when the tides turn.
Some might be tempted to adjust their equity allocations tactically, essentially trying to time their market participation. However, this approach is like changing your ship’s course with every wave. It’s not only exhausting but also ineffective in the long run. Instead, Intech proposes a different approach: using futures as a tool to offset risks and enhance returns.
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price. They can be deployed in two ways: through integration with an active equity portfolio or as an overlay strategy. Both approaches have their unique benefits and considerations, and choosing between them requires a deep understanding of your portfolio’s characteristics and your organization’s capabilities.
Integrated futures strategies involve seamlessly incorporating futures contracts into your equity strategy. This approach allows for swift adjustments to market exposure, insulates your portfolio from downside risks, and potentially amplifies returns. However, it requires specialized expertise and careful management to effectively target equity-specific risks and optimize capital efficiency.
On the other hand, overlay strategies apply futures contracts to the entire equity mandate, providing a broader risk management framework. While this approach offers comprehensive risk management and efficient portfolio rebalancing, it also introduces an additional layer of complexity. Managing overlay strategies effectively requires continuous monitoring and adjustments to align with evolving market conditions and investment objectives.
The Power of Futures in Managing Equity Risk and Adding Alpha
The increasing frequency of regime changes, driven by macroeconomic forces, has led to time-varying volatility, varying lengths of drawdowns and recoveries, and shifting cross-asset class correlations. This new market order has made the management of equity risk more complex and challenging.
Futures offer a powerful tool to navigate these complexities. They provide a mechanism to hedge against adverse market movements, thereby reducing portfolio volatility. This hedging capability is particularly beneficial during periods of heightened market stress, where futures can provide a buffer against significant drawdowns.
Moreover, futures can also serve as a source of alpha. By taking strategic long or short positions based on econometric forecasts and rebalancing adaptively, futures can generate additional returns, enhancing the overall performance of the portfolio. This ability to add alpha is especially valuable in today’s market dynamics, where traditional sources of alpha are increasingly hard to find.
In our upcoming posts, we will delve deeper into the intricacies of both integrated futures strategies and overlay strategies. We will explore their benefits and considerations in detail, providing a comprehensive analysis to guide investors in today’s new market order. Stay tuned for these insightful discussions, and let’s navigate the seas of equity risk together.
For U.S. Investors:
The views presented are for educational 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. This information should not be used as the sole basis for investment decisions. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. All content is presented by the date(s) published or indicated only and may be superseded by subsequent market events or other reasons. You should not rely on this information as the primary basis for your investment, financial, or tax planning 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 herein. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
This information 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:
The views presented are as of the date published. They are for educational purposes only and should not be used or construed as investment, legal or tax advice or as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. Nothing in this material shall be deemed to be a direct or indirect provision of investment management services specific to any client requirements. Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, are subject to change and may not reflect the views of others in the organization. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use. Janus Henderson Investors is the source of data unless otherwise indicated and has reasonable belief to rely on information and data sourced from third parties.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
Not all products or services are available in all jurisdictions. This material 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. Janus Henderson is 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.
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.
Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.
Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.
This information 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.
