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Multialternative Funds: Best And Worst Of December

Multialternative funds averaged a 1.20% loss in December, dropping their returns for 2015 to -2.39% versus a 2015 loss of 1.79% for the Morningstar Moderate Target Risk TR USD Index (the Index). For the three years ending December 31, the category averaged annualized returns of 1.77% versus 5.60% for the Index, with a beta relative to the Index of 0.51 and a Sharpe ratio of 0.38. On a beta adjusted basis, the funds underperformed the Index with -1.01% annualized alpha over the three-year period. The top-performing multialternative funds and ETFs in December posted gains of as much as 3%, and two of the top-three performers from 2015’s final month had one-year returns of greater than 8%. But of the six funds reviewed this month – the three best and the three worst – only one from each stack launched early enough to have three-year track records, and both underperformed the category averages in terms of returns, Sharpe ratio, and volatility. Click to enlarge Top Performers in December The three best-performing multialternative mutual funds and ETFs in December were: QSPIX and EXD both generated December returns in the +3% range, with QSPIX gaining 3.01% and EXD 2.94% for the month. Both funds were similar in terms of their annual returns, too, with QSPIX gaining 8.76% in 2015 and EXD adding 8.55% for the year. But only EXD, a closed-end fund that launched in June 2010, had three-year data available: its annualized returns stood at an unappealing -1.26%, and its seemingly good-looking -0.30 beta actually resulted in losses, as is evident from the fund’s three-year alpha of +2.86%. In all EXD’s three-year Sharpe ratio was only 0.20, and its three-year standard deviation of 5.87% was the highest of all qualifying funds reviewed this month. AQR’s QSLIX rounds out December’s top three. The fund, which launched September 2014, returned +1.82% in December and +4.02% for the year. Worst Performers in December The three worst-performing multialternative mutual funds and ETFs in December were: SANAX was December’s worst-performing ’40 Act multialternative fund, returning -4.16% for the month. For the year, the fund lost 8.18%, which dropped its three-year annualized gains to just 0.74%. Through December 31, the fund had a three-year beta of 0.52, but generated alpha of -2.12% with 5.21% annualized volatility. As such, its Sharpe ratio for the period stood well below the average for its peers at 0.16. QSTAX and the Transamerica Global Multifactor Macro Fund both launched in 2015 and thus didn’t have three- or even one-year return data as of December 31 of that same year. In December they lost 4.11% and 3.96%, respectively. Past performance does not necessarily predict future results. Jason Seagraves and Meili Zeng contributed to this article.

Asset Allocation For 2016

Key views: 1-3 months: short Gold long DAX long XLY / short XLP 6-12 months: short XAUUSD short XLE / long SPX long GBPJPY 12+ months: short R2K / long SPX short AUDNZD In spite of the ugly start of the year, I do not think there have been fundamental changes in the global markets since a year ago. A regime shift actually occurred in 2014-2015. By that time, the global economy had managed to stage a mostly uninterrupted, albeit very slow, recovery. In 2014, it became clear that the global market cycle was entering its late stage. At that time, risk asset valuations had reached “fair value” levels across the asset classes, following 5 years of a fairly re-rating on the back of extremely accommodative monetary policy globally. The Fed then made it clear that monetary policy would gradually tighten and the markets priced this in rapidly, mostly by bidding up the US dollar and selling short dated treasuries. Due to the still deeply embedded remains of the “forward guidance”, the market moves were big, prompting volatility to return to more normal levels not seen in years. At the same time, the US economy began showing signs of mid-cycle dynamics, with the unemployment rate sharply falling closer towards most estimates of NAIRU, consumer confidence rising to cyclical highs and M&A activity surging. The environment in which most of today’s prime-aged investment professionals built their careers is characterized by “irrational exuberance”, with stock market valuations typically ballooning during the bull markets and deflating rapidly during recessions. Many got burned in the process and I do not think that the industry will get ahead of itself once again. It is more likely that valuations would remain at fundamentally justified levels (rather than trending up persistently), with the stock market only collapsing in case of catastrophic outcomes. In addition to the US financial and economic cycles, a few other cycles are important for understanding the current regime. The commodity cycle is still in its downtrend. I do not think anyone is good enough at forecasting spot prices of commodities based on supply and demand fundamentals. The safest strategy is to look at where the trend is and stick to it until it reverses. This is how CTAs have been making money for decades trading commodities and I feel no need to reinvent the wheel. The commodity price decline is fundamentally related to a number of other developments: a continued evolution of the global economy from manufacturing to services, the weakening demand from China, the fracking revolution and more recently the rise of the US dollar. All these interrelated trends are putting an immense amount of pressure on emerging economies. While emerging market currencies have fallen substantially, a more decisive shift from the old growth model will be required in order to adjust to the evolving world. There will inevitably be both winners and losers in this game. Equivalently, the developed market economies are experiencing a similar challenge, with manufacturing and extraction showing signs of continued weakness, and tight financial conditions depressing US corporate earnings. Going forward, I anticipate a continuation of the desynchronized market patterns across the world and return of volatility to normal levels. My hunch is that strategists and fund managers in the industry generally seem to be experiencing quite low levels of conviction in their views. There is also a healthy amount of bears in the market, which should lead to a better balance, despite higher volatility. In such an environment, relative value trades will be a much more important source of return generation compared to simple exposure to broad markets. Quantitative indicators for “alpha potential” from bottom-up stock picking have still not normalized (even though it has improved), so I expect that single stock selection will still struggle in 2016. However, big picture long/short macro positions should work well at the time when most investors continue to fret over whether we are in a bull or a bear market. In 2016, cross-asset performance will be driven by a small number of key risks. The most important ones: US Monetary policy, Chinese economic slowdown and the commodity price collapse. I will be writing about these, as well as about my key trades, in the following weeks, so stay tuned.

ETF Relationships That May Tell You When The Worst Is Over

Businesses, consumers and the federal government have taken on enormous amounts of debt since the Great Recession. Optimists argue that total debt is irrelevant; that is, they believe the only thing that matters is the cost of servicing those debts. Fair enough. Then what happens when interest expense does rise? Assuming total debt remains the same, higher rates would increase the percentage of household income or the percentage of corporate/government revenue that must be allocated to debt servicing. In earlier commentary, I provided data showing how the total debt of corporations has DOUBLED since 2007. Thanks to seven years of zero percent rate policy, alongside a number of iterations of quantitative easing (QE), the average rate on corporate debt is down from eight years ago. More critically, however, average interest expense has risen substantially . That’s right. Corporations need to assign more and more of their “gross” toward paying back the interest on their loans. What about households? Well, we’re back to the 2007 record debt level of $14.1 trillion in mortgages, credit cards, auto loans, student loans and credit cards; the typical household has nearly $130,000 in total debt. The good news? Years of stimulative monetary policy has made it easier for households to service these debts. The bad news? Americans “re-leveraged” rather than “de-leveraged.” Any amount of rate hike activity would damage the ability of average Americans to borrow-n-spend. In fact, recent retail data demonstrate just how little Americans feel they have left over to spend, in spite of massive savings at the gas pump. Traditional home affordability measures like median sales price-median income illustrate just how dependent we are on ultra-low interest rates. Specifically, the historical home price-to-household income ratio is 2.6. Where are we at today? Back near the housing bubble highs of 4.0. It certainly does not get any better if one looks at U.S. government obligations. The national debt is roughly $19 trillion, excluding the country’s unfunded liabilities (e.g., Social Security, Medicare, Medicare prescription drug program, federal pensions, etc.). According to Dave Walker, the former head of the Government Accountability Office (NYSE: GAO ) under Presidents George W. Bush and Bill Clinton, the national debt is closer to $65 trillion, including unfunded liabilities. Does anyone believe that those numbers are going to get smaller? Or even, heaven forbid, remain the same? In other words, rising interest expense or rising debt levels would make it even more difficult for the government to honor its obligations. Is it any wonder, then, how schizophrenic riskier assets are? It is the direction of the Fed’s rate normalization path – no matter how gradual – that has nudged the bear out of hibernation . China? Its slowing economy adversely affects corporate profits, but it’s the Fed’s perceived reluctance to “save stocks” that has agitated market participants. Oil? Its rapid-fire descent highlights the possibility of a worldwide recession, though it is the Federal Reserve’s disinclination to “step in” that is rocking investor confidence. Fortunately, there are a number of ETF relationships that can help a cash-heavy investor identify when things may be getting better. More precisely, when “risk-off” relationships abate, one may feel more upbeat about shifting from a mode of capital preservation to a mode of wealth accumulation. Consider the relationship between gold and oil. When people prefer the precious metal to the natural resource, they are expressing a preservation preference. And vice versa. When investors speculate that oil prices will rise, they are typically expressing confidence in the growth of the global economy. It follows that the SPDR Gold Trust ETF (NYSEARCA: GLD ) : The United States Oil ETF, LP (NYSEARCA: USO ) price ratio is likely to climb in troubling times; it is likely to spike in panicky stock sell-offs. One might wish to see the slope of the GLD:USO 200-day moving average flatten out – and the GLD:USO price settle down a bit – prior to making huge commitments to riskier assets. Granted, the rapid depreciation of oil itself has had a fair amount to do with the general trend of GLD:USO. Nevertheless, all three of the most recent corrective phases in U.S. stocks – October of 2014, August-September of 2015, January of 2016 – dovetail perfectly with spikes in GLD:USO. In the same vein, the flattening of the yield curve tells market watchers that participants are concerned about recession probabilities. The difference between the 10-year Treasury bond yield and the 2-year Treasury bond yield has fallen to lows that we haven’t seen since the Fed shocked-n-awed the world with its most powerful stimulus ever, QE3. Of course, some folks prefer to remain in the world of specific ETF assets as well as rising/falling price ratio relationships. For those investors, I suggest that they track the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ):iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) price ratio. A rising price ratio implies that people are seeking safety in the middle of the yield curve, while others may be avoiding the short end of the yield curve due to Federal Reserve rate hike intentions. Thus, the yield curve is flattening when IEF:SHY is rising. Since the stock market highs in July, IEF:SHY has, for the most part, been on a steady path higher. A sustained reversal in this trend would be an indication that investors are growing more comfortable with the health of the domestic economy. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.