Forget the Banks, it’s Stress Test Time for Alternatives

Dow down 1000With 1,000 point swings in the Dow and problems in China – the pressure is on for the hard working folks in the alternative space. For the past five to six years, alternative assets have been exploding; growing in part because many of them promise non correlated performance to stocks and bonds –  meaning, they look to provide diversification in your portfolio when the market finally takes a turn lower.

Well, for really the first time since the financial crisis, the market (as if there’s only one) is showing signs of turning. There was the Dow down 1,000 points, and equity markets overall down around -10% from their highs, entering “correction territory” as someone arbitrarily labeled it long ago.  In baseball terms – you put a knuckleball hitter on the payroll a while back, but he’s yet to see the field. Now, finally, you are going up against a knuckleball pitcher, and get to see just what you’ve been paying for.

This is looking like the first time in a long time Alternatives are going to be asked to carry the load, and we can’t wait to see where the August dust settles in the coming days/weeks. We did our best last week to highlight a couple of managed futures managers that captured the market volatility, but we’re also hearing stories of big firms like Transtrend having had a tough go of it during the spike in volatility. And that’s just in the managed futures space…. What type of number will everyone’s favorite alternative, long/short equity, post on the scoreboard for August? What about private equity?  And don’t even get us started on real estate and commodities, the latter of which has famously led this move lower.

Now, we’re well aware that it’s just one month, and that even those alternatives who lose money are likely to do it in a less volatile way than pure stocks. But this really comes back to why investors bought an alternative and what they are expecting out of it. If they’re expecting negative correlation (often times conflated with non-correlation), they may be disappointed with their Alternative investment. In the case of Private Equity, Long/Short Equity, Commodities, and Real Estate – there’s nothing you can really do about that. Those investments tend to be highly correlated to equities, especially in times of market stress (see our whitepaper or infographic for more on that)

If you’re talking Global Macro and Managed Futures, it’s a little trickier. You see, those tend to be negatively correlated to stocks in times of market stress; but not necessarily at the moment of max stress (like the crazy Aug 17 to Aug 24 week). They tend to require some follow through on the downside, where five weeks of stock market losses might see managed futures lose in the first two and make money in the last three. What’s more – those programs which are more heavily geared towards financials (stocks, bonds, currencies) can see outsized effects from bouts of volatility in stock indices; as they have less protection via diversification into multiple asset classes, and can see problems exiting positions in a crisis as everyone rushes for the same exit.

So, we’re nearly as excited to see the August numbers as we are for football season (nearly… not quite). It will certainly be an interesting couple of days as we watch returs roll in for asset classes and individual programs. Did hedge funds lose money (yes), and we’re bound for a whole new slate of S&P and hedge fund performance comparisons.  Anybody blow up?  What type of exposure did they have? What about for the “Managed Futures” category of Mutual Funds in Morningstar? What was the dispersion in August returns there? What about trend following strategies compared to the short term traders and relative value traders?

This isn’t to say this is how your alternatives will perform during a full on, months long actual crisis; but it’s certainly a good time to pay attention to why alternatives investments are performing the way they are. It’s time to see what that knuckleball hitter you’ve been paying to ride the pine can do in the real game.  Put me in coach!

Write a Comment

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

logo