Author Archives: Scalper1

Evaluating Alternatives In 4 Growth And Inflation Scenarios

By DailyAlts Staff Alternative strategies aren’t a homogeneous bunch. Due to their generally unbenchmarked nature, alternative funds within the same category can vary greatly in terms of their objectives, strategies, and risk/return characteristics, to say nothing of the wide diversity of funds and strategies across the universe of alternative styles. In a new white paper titled ” Alternatives in action: A guide to strategies for portfolio diversification ,” Putnam Investments’ Christian Galipeau, Brendan Murray, and Seamus Young set out to answer two questions: What are reasonable performance expectations for alternative investment strategies? How can these strategies fit into a portfolio of traditional assets? For their study, they looked at four alternative categories over the past 20 years, breaking those categories down into sub-styles where appropriate. Their findings: Not surprisingly, different strategies have performed better under different economic scenarios, but funds from the “Risk Reducer/Volatility Dampener” category – such as multi-strategy and global macro funds – have had the most consistent risk-adjusted returns over the past two decades. Classification of Styles For purposes of their analysis, the Putnam Investments authors break alternatives into four broad categories: Return Enhancers Inflation Hedges Risk Reducer/Volatility Dampeners Zero Beta/Zero Correlation The authors then look at how each category has performed under various economic environments over the past 20 years. For the Return Enhancers category, they look at the performance of the Cambridge Associates US PE Index as a proxy for private equity (“PE”). For Inflation Hedges, their benchmark is the S&P GSCI Gold Index Total Returns, as a proxy for precious metals. The Risk Reducer/Volatility Dampeners and Zero Beta/Zero Correlation categories are split into two and three sub-styles, respectively. The former includes multi-strategy and global macro funds, as measured by the Credit Suisse Hedge Fund Index for each style; and the latter includes managed futures, market neutral, and convertible arbitrage funds, also represented by Credit Suisse benchmarks. Future Economic Scenarios “Understanding how different alternative strategies may behave in different environments is essential to utilizing alternatives as an effective source of diversification over market cycles,” the authors write. They look at the performance of each style and sub-style over the period from 1994 to 2013, across four economic scenarios [Growth (G) / Inflation (I)]: G+/I+: Above-trend economic growth with above-trend inflation. G+/I-: Above-trend economic growth with below-trend inflation. G-/I+: Below-trend economic growth with above-trend inflation. G-/I-: Below-trend economic growth with below-trend inflation. As shown in the image above, “G+/I+” has been the most common scenario over the 20 years ending with 2013, but it isn’t necessarily likely to be the most common over the next 20. Performance Under Different Cycles Global macro funds provided the best risk-adjusted returns under G+/I+, G-/I+, and G-/I- scenarios – only the rare and unlikely G+/I- (high growth/low inflation) scenario did another style outperform global macro on a risk-adjusted basis, in this case private equity. The image below shows the risk-adjusted returns of all the strategies under review, as well as traditional assets, over the 20 years ending in 2013: But when using alternatives within a portfolio, another important consideration is how the strategies correlate with other assets in the portfolio. Not surprisingly, the Zero Beta/Zero Correlation sub-styles performed best in these terms, with market neutral funds having the lowest equity beta and correlation under the G+/I+ scenario, and managed futures earning that distinction under G-/I+ and G-/I- scenarios. In closing, the authors state that their study confirms that “alternative strategies can represent valuable innovations to the toolbox of portfolio choices.” Further, “in specific types of economic periods, the performance of some alternatives can diverge from their long-term characteristics.”

Managed Futures: Best And Worst Funds In October

By DailyAlts Staff Managed futures funds suffered category-wide losses of 1.82% in October, reversing course after posting gains of 1.21% the prior month. There were still standout performers within the category, though, as the top three managed futures funds notched monthly gains ranging from 1.20% to 2.53%. The category’s bottom three performers, meanwhile, averaged losses of 4.70% – indicating a wide dispersion of returns between the best- and worst-performing funds. (click to enlarge) Top Performing Funds for October The top three managed futures funds for October were: The Dunham Alternative Strategy Fund was the month’s best-performing fund, posting gains of 2.53%. The fund, which debuted in 2009 and recently had $23.4 million in assets under management (“AUM”), had five-year annualized returns of -0.36% for the period ending on October 31. Its one-year returns through that date was positive at +0.29% but still well under the category average of +5.24%. DAASX did significantly outperform its peers over the three months ending on Halloween, though, as it gained 0.04% compared to the category’s losses of 2.56%. It appears that the fund may be gaining steam. The Superfund Managed Futures Strategy Fund and the Grant Park Managed Futures Strategy Fund were the number-two and -three best-performing managed futures mutual funds in October, posting respective gains of 1.28% and 1.20%. It was something of a bounce-back month for both funds, which had each underperformed over the 12 months ending October 31: SUPIX ranked in the bottom three of September’s performers and lost 5.95% for the year ending Halloween, while GPFIX’s gains of 3.87% still trailed the category average of +5.24%. The funds had respective AUM of $4.9 million and $51.8 million, and were originally launched in 2013 and 2011, respectively. (click to enlarge) Bottom Performing Funds for October The managed futures funds that posted the worst one-month returns in October were: The AQR Managed Futures Strategy HV Fund was at the very bottom of the category, with its shares falling 4.93% for the month. Shareholders are likely able to take those losses in stride, though, since the fund gained an impressive 21.54% for the year ending October 31, ranking at the very top of the managed futures category. QMHIX originally launched in 2013, and its AUM recently stood at $505.9 million. The month’s other worst performers were also outperformers over longer periods: The Arrow Managed Futures Strategy Fund, which posted a 4.61% loss in October, had one-year gains of 7.89% for the year ending October 31; and the American Beacon AHL Managed Futures Strategy Fund, which was the month’s third-worst performer with losses of 4.56%, had one-year gains of 9.08%. Of the two funds, MFTNX is older but smaller, with its original launch in 2010 and AUM of $29.6 million, compared to AHLIX’s 2014 debut and $100.8 million in AUM. (click to enlarge) September’s Best and Worst: Follow-Up There were no repeat winners or losers in the top or bottom three from September to October. Indeed, all three of September’s top performers posted losses in October, and two of September’s three worst managed futures funds notched gains – one of September’s worst, the Superfund Managed Futures Strategy Fund, jumped into October’s top three. The Altegris Futures Evolution Strategy Fund (MUTF: EVOIX ), the 361 Global Counter-Trend Fund (MUTF: AGFZX ), and the LoCorr Managed Futures Strategy Fund (MUTF: LFMIX ) – which posted respective gains of 5.30%, 4.40%, and 3.78% in September – saw their shares fall by 2.56%, 1.34%, and 2.39% in October. Meanwhile, the Superfund Managed Futures Strategy Fund ( SUPIX ) and the Discretionary Managed Futures Strategy Fund (MUTF: FUTEX ) – the second- and third-worst performing funds in September, with respective losses of 1.58% and 0.77% – bounced back with respective gains of 1.28% and 0.19% in October. Remember: The category average for October was -1.82%, and with that in mind, even September’s worst performer – the 361 Managed Futures Strategy Fund (MUTF: AMFZX ), which lost 4.81% in September – outperformed the average, as it only lost 1.74% in October. Past performance does not necessarily predict future results.