The Need For Managed Volatility – Systemic Risks

This is the first in a five part series in which we will discuss why a Managed Volatility approach is prudent for investors today. To begin the series of articles let’s start with the macro topic of, Identifying Systemic Risks.

Many investors today are in disbelief about the sustainability of the current bull market. As the market climbs a wall of worry, it is important to understand where the demand is coming from that keeps the market moving higher. With that understanding investors can begin manage the macro risks of the markets more effectively. It may also explain why US equities have outperformed most other asset classes for the last few years.

It is not the purpose of this article to identify all of the systemic risks that could derail the markets, as much as it is to provide an example of a large risk that can be marginalized with a Managed Volatility approach. It is also important to mention that there are several ways to manage volatility, each with their own advantages, disadvantages, and cost structure.

In today’s article, the systemic risk worth exploring is “What Will Happen When Companies Stop Buying Back So Much Stock?”

What Will Happen When Companies Stop Buying Back So Much Stock? businessinsider.com

Corporate stock buybacks have driven stock prices higher over the last several years. These buybacks cannot continue indefinitely…

Blending Absolute & Relative Return Objectives Into a Single Strategy

The end of the 30 year bull market in bonds has driven many advisors to incorporate alternative investments into their clients’ portfolios, to act as a “bond alternative” and to reduce portfolio volatility. This however presents many challenges for advisors and their clients.

The investment industry has been happy to respond with a flood of new mutual funds that are watered down versions of hedge funds so they can operate inside the limits of a 40 Act mutual fund structure. If an advisor is lucky, the net result for many of these products will be the desired outcome…a bond alternative.

What if the desired outcome were different? What if an outcome-oriented solution were not a bond alternative, but to blend absolute and relative return objectives into a single strategy? Could the result be different, than a bond fund in a bond bull market?

These questions were presented by IronGate Investment Management to Newfound Research over a year ago. Newfound, a pioneer in “Outcome-Oriented Solutions”, began the process by refining the questions, to solve two important investor problems:

* Problem #1: Non-core exposures can underperform core exposures significantly, in the short and medium term (2003, 2006, 2009, 2012, 2013).

* Problem #2: Diversification can disappear when needed the most. In 2008-09, emerging market equities, REITs, and commodities all lost more than 60%, exacerbating large core equity market losses during the same period.

The result was the Risk Managed Core Diversifier index, a single strategy that seeks to adapt to the current environment (bull or bear), and the risk factors that drive asset class return profiles (economic growth, inflation, & correlations).

A global multi-asset investment universe of liquid ETFs provides access to very cheap beta, without having to delve into the foggy world of derivatives, leverage, shorting, performance fees, black boxes, lock up periods, or transparency. Newfound Research was able to apply their core quantitative process to a broader set of risk assets to balance the risk/return trade-off of diversification with the need to be tactical.

To learn more, click The Risk Managed Core Diversifier Index

To learn more about “Outcome-Oriented Solutions” and blending absolute and relative return objectives visit:  www.ManagedVolatility.com

Solving the alternatives riddle

investmentnews.com

Alternative investments have never been as readily available to financial advisers as they are today. But for many, implementing the strategies in a portfolio may seem as daunting as solving a Rubik’s Cube that has been deep fried in secret sauce. In…

Smart Beta vs. Intelligent Diversification

Click here for Intelligent Diversification – Periodic Table

Smart Beta is receiving a lot of media attention and asset flow these days. But what about “Intelligent Diversification”?

If smart beta strategies are alternatives to market-cap weightings, then what do you call strategies that seek to maintain diversification benefits when correlations are rising…”Intelligent Diversification”?

As the BlackRock article below points out, diversification is difficult when correlations are rising. This is especially true for non-core exposures as advisors are sold them under the notion that they have a low correlation to core exposures.

The problem is that every asset class has changing correlations, including alternatives. In fast markets (or crisis periods) correlations often move towards one, and diversification can disappear. At IronGate we believe diversification is a good first line of defense, but it has its limits, and balance the need to be tactical by aggressively raising cash.

Now that the 30 year bond bull market has been officially pronounced dead, advisors need to be more vigilant about managing portfolio risk. Gone are the days when an advisor can simply add core fixed income to a US equity portfolio and maintain diversification (as the BlackRock article clearly points out).

As advisors add more complex alternative strategies to their clients’ portfolios, it is even more important to measure the portfolios’ effectiveness in maintaining diversification. For many advisors, it would be more effective to have a single solution to serve as a core-diversifier so they can focus on serving their clients and growing their business.

To learn more, click: http://www.ManagedVolatility.com

Diversification is Difficult When Correlations are Rising: Alternative Investments Education Center: Tools: Financial Professionals: BlackRock

www2.blackrock.com