The equity landscape is evolving rapidly, presenting today’s investors with unprecedented challenges. Short-term market cycles have made it increasingly difficult to capture long-term alpha, navigate sudden spikes in volatility, and preserve the integrity of portfolio diversification. This new frontier of investing requires a fresh approach to equity investing that can address time-varying risks, including heightened volatility, frequent drawdowns, and shifting cross-asset correlations. In this blog post, we’ll summarize the key points of our in-depth paper and discuss an innovative solution for equity investors in today’s complex market environment.
Time-Varying Risks
VOLATILITY
Market volatility has increased, with economic cycles, geopolitical uncertainty, algorithmic trading, and market sentiment contributing to this phenomenon. Increasing and time-varying volatility has significant implications for investors, as it can erode returns, increase the likelihood of drawdowns, and complicate the task of portfolio diversification. To navigate this challenge, investors must adopt strategies that effectively manage volatility while capturing alpha.
DRAWDOWNS
Drawdowns have become more frequent and severe in recent years. The magnitude, frequency, and duration of these phenomena require investors to be prepared and develop strategies to manage and mitigate drawdown risk. A well-designed portfolio should be able to weather drawdowns without compromising its long-term performance.
CROSS-ASSET CORRELATIONS
Shifting correlations between asset classes can undermine portfolio diversification objectives, making it challenging for investors to construct portfolios that can withstand market fluctuations. By understanding how correlations change over time and incorporating this knowledge into their investment strategies, investors can better manage risk and improve portfolio resilience.
Revolutionary Solution: Alpha with Resiliency
To address these time-varying risks, we propose an innovative approach to equity investing that systematically adjusts exposures in response to both short- and long-term risk cycles while offering convexity to hedge tail-risk events. This solution involves synthesizing managed futures into equity strategies, creating a versatile, all-season portfolio that can potentially deliver better diversification, risk reduction, and improved risk-adjusted returns.
By allocating 5% of the cash in an equity strategy to collateralize a multi-asset, exchange-traded futures strategy, investors can create a new framework for time-varying risk management. This combination provides the necessary flexibility to respond to market changes while retaining the performance characteristics of a typical large-cap core equity strategy.
Access Convexity
The relationship between equities and managed futures is convex, meaning that as one asset class experiences losses, the other may experience gains. This non-linear relationship offers several potential benefits for investors, including better diversification, greater risk reduction, and improved risk-adjusted returns. By integrating managed futures and equities, investors can increase diversification within and across asset classes, reduce equity and overall portfolio risk, and potentially enhance returns.
Integration, Not Overlays
Instead of integrating equity and managed futures strategies, some investors might consider a managed futures overlay. However, we argue that an integrated approach is more practical and offers several advantages:
- Capital Efficiency: Integrating managed futures within an equity strategy allows for more efficient use of capital and margin requirements.
- Performance Efficiency: An integrated approach can be more responsive to changes in market conditions, maximizing potential benefits.
- Cost Efficiency: Managing both portfolio components within the same structure can reduce trading costs and simplify the investment process.
- Governance Cost: Particularly relevant for pension funds, integrating strategies can lead to lower governance costs compared to overlays, as it streamlines the decision-making process and reduces the need for additional oversight.
Modernize Your Equity Strategies
Equity investors face an increasingly unpredictable market environment characterized by relentless regime changes. Traditional risk management tools often fail to address these complexities without negatively impacting alpha. As a result, investors must look towards innovative approaches that can adapt to the evolving landscape.
Our in-depth paper presents a compelling case for integrating managed futures into equity strategies, creating a versatile, all-season portfolio that systematically adjusts to both short- and long-term risk cycles. This integration not only offers better diversification, risk reduction, and improved risk-adjusted returns but also proves to be more capital-efficient, performance-efficient, and cost-effective than a managed futures overlay.
In this era of market uncertainty, it is crucial for investors to adopt forward-thinking strategies that address the challenges of today’s markets while maintaining the potential for long-term success. By embracing the integration of managed futures in equity strategies, investors are better positioned to navigate the complexities of the modern financial landscape and achieve their investment objectives.
We believe the time has come to modernize your equity strategies, revolutionize your approach, and prepare your portfolio for the challenges that lie ahead. By understanding and addressing time-varying risks and adopting an innovative approach that integrates managed futures into equity strategies, investors can build resilient portfolios designed to thrive in the face of market turbulence and uncertainty.
Download the Full Paper
Equip yourself with the knowledge and tools necessary to navigate the complexities of the modern financial landscape and achieve your investment objectives. Download the paper now and learn how to transform your equities for the road ahead.
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.
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.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This material has not been approved, reviewed, or produced by MSCI.
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.
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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.
An index is unmanaged, is not available for direct investment, and does not reflect the deduction of management fees or other expenses.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This material has not been approved, reviewed, or produced by MSCI.
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.
