The current market phase is providing fertile ground for the use of alternative strategies: they offer a completely different risk/return profile from traditional, solely directional investments. This feature brings numerous benefits such as decorrelation, primarily from market beta and efficient protection from downside risk.
In this phase of enormous uncertainty, volatility (The historical one, which is not implied volatility) is certainly another variable to be managed. It is necessary to build portfolios or invest in products that constantly monitor risk ratios.
The investment goals and time horizon, are essential choices for the longevity of an investor, although, having zeroed out the needs on the money invested, the best path to pursue is always that of the perennial portfolio, with the 4 percent rule being the rule: the money becomes a source of income and a tool at our service, working for us and not the other way around.
The real desired feature in times of turbulence is decorrelation, because Diversification also needs to be supplemented with explicit hedging: The perceived benefits from diversification have been historically responsible for a large number of catastrophic financial crises. The reason has to do with the instability of correlations: when a market falls, market decorrelations cancel out, almost the entire market becomes unidirectional, and we rarely see the maintenance of valid decorrelation values.
This is why hedging is necessary, always.
Those who say that trying to find the solution that gives the best balance between return and protection do so in such a way that their interlocutor is often left disoriented. The strategies that in our opinion bring the greatest benefits to the efficient frontier are Long/Short strategies, applied, in our case, to equities.
At a time of inflation and generally rising interest rates, active portfolio management is even more indispensable, DIY investors included.
The current inflationary environment will bring an increasing increase in performance dispersion within the various stock and bond indices; we believe that analytical work on individual companies is key to generating alpha.
A bottom-up approach is always to be preferred, even when the portfolio payoff has an asymmetric profile due to the exploitation of convexities; the latter approach proves to be successful when value-seeking stock picking work underlies everything.
Therefore, more than ever, it comes to be said that the best time to seriously consider these alternative strategies is now.