Photograph of Ryan Korinke, Head of Hedge Fund and Quantitative Strategies
Ryan Korinke: Most of our alternative conversations with investors over the last few weeks have really focused on how to capitalize, how do I take advantage of these conditions and these dislocations.
I would say now they're starting to increase as far as people looking for ways to diversify. Either everyone’s now had some time to regroup and say, “Wow, March was a little bit rougher than I wanted or I liked or I realized I had tolerance for.” Or they're saying, “You know, look, March was okay, but, wow, we've had a nice strong rally the last two months. I'm worried about some of the uncertainty, things like election in the US later this year, trade and geopolitical tensions that continue to be around. And so, maybe I should look for some trading strategies or asset classes that held up well in the beginning of 2020 in case we start to have that type of volatility.”
A couple of things I would highlight there, first, would be trend following or time series momentum.
To put it simply, the basic idea is that, in general, prices that are going up continue to go up and, in general, prices that are going down continue to go down and the idea behind that is that humans are just slow to incorporate new information. And so, maybe there’s a new economic release that comes out, or maybe there's a new corporate piece of information that comes out. And yes, the price goes up because of that release, but it doesn't go up as much as it should, because people just don't reflect that new fundamental information as quickly as they should.
This was an area that historically has had very negative correlation to equities, particularly in more stressed environments. We saw that in the beginning of 2020. So if you look at the Soc Gen Trend-Following Index, it was up about 2.7% in the first four months of 2020. At a time when equities are down 10-15% depending on the index.
In general, we think when you have markets that are moving quickly, responding to uncertainty, repricing, trend followers are able to pick this up, put on the short-risk asset positions, put on the long-bond positions or short difference currency, long difference currency positions, quite quicker and respond to that than we might be able to pick up on. And thus, give you that much more favorable correlation diversification properties. So we think that's an interesting space to continue to look at.
The second one that I would mention would be insurance-linked securities. If you look at the Swiss Re Cat Bond Index, that was up about 65 basis points for that same January to April period at the beginning of the year.
Looking forward, we think it's interesting, because if you look at what the pandemic has done on the insurance industry more broadly, some insurers and reinsurers have exposure to things like event cancellation insurance or business interruption insurance. So if you listen to some of the insurance and reinsurance quarterly earnings calls, many of the executives on these are talking about a hard market. Which simply means there's less capital for new deals and for premium renewals. So that, as a result of that, yields are going up.
Finally, I would say that we still think that multi-strategy, multi-asset class systematic strategies are another interesting area. What I would say is that there was also a wide variety of signals or trading strategies that we follow, and often times implement, that fared very well during the Coronavirus-induced February, March sell-off. So we think that's an interesting area to consider. If you think about it, it makes sense. It was really hard in March to do something bold, to buy things that had cheapened out, or to avoid doing things that you might later regret, sell things that maybe were going down in price but hadn't really changed in value. But a computerized or a systematic strategy doesn't face that same bias, and so that can be very helpful in these types of scenarios.
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All investments contain risk and may lose value. Hedge funds and other alternative investments involve a high degree of risk and can be illiquid due to restrictions on transfer and lack of a secondary trading market. They can be highly leveraged, speculative and volatile, and an investor could lose all or a substantial amount of an investment. Alternative investments may lack transparency as to share price, valuation and portfolio holdings. Complex tax structures often result in delayed tax reporting. Private placements are subject to less regulation and often charge higher fees. Alternative investment managers typically exercise broad investment discretion and may apply similar strategies across multiple investment vehicles, resulting in less diversification. Trading may occur outside the United States which may pose greater risks than trading on U.S. exchanges and in U.S. markets.
Trend-following is a strategy that seeks to make profits by capitalizing on the long-term general direction of a market trend. Trend-following typically Involves the use of proprietary trading systems and primarily managed futures strategies, to react to price trends in various global markets. Managed futures contain heightened risk, including wide price fluctuations and may not be appropriate for all investors. Long/short managers seek to produce equity-like returns without the typically higher volatility associated with long-only strategies. Long is buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price. Short is selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, the potential loss on an uncovered short is unlimited.
Insurance-linked instruments provide exposure to various insurance risks and are tied to a varied group of available perils and geographic regions. Such perils will consist, amongst others, of earthquake, flood, hail, wind or other weather-related risks, and may include exposure to other natural or non-natural catastrophic events. Examples of insurance-linked instruments include, but are not limited to, securities or other financial instruments linked to excess of loss, quota shares or other reinsurance or derivative risk transfer contracts, catastrophe bonds, industry loss warranties, sidecars, over-the-counter financial derivatives, listed derivatives (i.e., futures/options on futures) and equity and/or debt securities. of insurance and reinsurance companies. The performance of insurance-linked instruments depends on the occurrence or non-occurrence of specific insurance events, including such catastrophic events mentioned above, and the incidence, frequency and severity of such catastrophic events are inherently unpredictable.
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