The Impact of Recent Romantic Relationships and the Present Economic Landscape on the Diversified Investment Markets' Performance
In the ever-changing world of investments, understanding the performance of different financial instruments is crucial. A recent analysis delves into the impact of new relationships, the macroeconomic climate, and the performance of multi-asset class hedge funds versus the S&P 500 during the recent market cycle.
New Relationships and Portfolio Performance
The formation of new relationships, such as those seen in the context of Prosperity Bank, can lead to increased inflows into financial institutions. This trend can reflect positively on the overall financial health and investment opportunities available, potentially benefiting multi-asset funds indirectly by providing more robust market conditions.
Moreover, multi-asset class hedge funds often leverage diversification across different asset classes to manage risk and seek returns. This diversification can help funds navigate challenging macroeconomic conditions more effectively than a single asset class investment like the S&P 500.
Macroeconomic Climate Impact
The volatile macroeconomic environment, as highlighted by BlackRock, injects risk into portfolios that need active management. Multi-asset class funds are positioned to manage this risk through their diversified portfolios.
In a regime of transformation and higher market volatility, top-performing portfolio managers in multi-asset class funds have more opportunities to generate alpha compared to passively managed indices like the S&P 500.
Comparison with S&P 500
The performance of multi-asset class funds like the L&G PMC Multi-Asset Fund 3 has shown mixed results over the past few years, with some periods outperforming sector averages and others underperforming. The S&P 500, while being a broad market index, can experience significant fluctuations due to macroeconomic factors.
Multi-asset class funds generally aim to manage risk through diversification, which can help mitigate losses during downturns more effectively than a singularly focused index like the S&P 500.
Key Findings
- Performance Metrics: The performance of multi-asset class funds varies, with some periods outperforming sector averages and others underperforming.
- Risk Profile: Multi-asset class funds offer diversification benefits and potentially lower volatility in certain conditions.
- Monetary Policy Impact: Fixed-Income, due to zero lower-bound monetary policy, is extremely low yielding and does not provide that equity correction protection anymore.
- Alpha Generation: The annual +6.63% alpha generation of multi-asset funds has essentially completely evaporated down to an annual +0.10% of alpha during the 2008 - 2018 period.
- Correlation and Beta: During the 2008 - 2018 period, multi-asset funds under-performed the market while nearly doubling their correlation (72%) and increasing their beta coefficient (0.23) to the market.
In conclusion, multi-asset class hedge funds can provide a more stable or specialized investment strategy compared to the broad market exposure of the S&P 500. However, their performance can vary based on specific strategies and market conditions.
The analysis used monthly returns from January 2000 - December 2018 and looked at three different time periods: over the lifetime of data (2000 - 2018), 2000 - 2007, and 2008 - 2018. Potential explanations for the changes in performance include the zero lower-bound monetary policy environment affecting fixed-income derived returns, higher volatility of the funds due to the change in correlation in fixed-income and equity markets, and manager/investor pressure to create higher returns.
The speaker will expand on the 'alternatives asset class' in future articles. They also addressed questions about the future of hedge funds and whether there should be investment into them at a CFA event. The speaker considers hedge funds utilising certain markets and strategies as part of the 'alternatives asset class' due to their lack of market exposure to the traditional asset classes.
In the current macroeconomic climate, equities are in their longest ever bull-run, widely considered as the 'most hated bull run' due to the artificial nature brought by central bank monetary policy. Commodities have an increasing relationship with equity markets since the Global Financial Crisis. Every year, bar one, the multi-asset fund proxy had the same directional return as the S&P500 during the 2008 - 2018 period. The analysis compared the performance with the S&P500 returns.
The speaker believes that hedge funds have a very important role within an investor's portfolio due to their unique liquidity and tradeable markets characteristics. Over the lifetime, multi-asset funds outperformed the market with lower volatility, but most of the outperformance came from the 2000 - 2007 period. REITs, during the previous two recessions, had around a 70% and 80% correlation respectively. The analysis was conducted using the HFRI Diversified Fund of Funds Index as a proxy for performance of hedge fund multi-asset class performance.
[1] L&G PMC Multi-Asset Fund 3 Performance Data (link)
[2] Prosperity Bank (link)
[3] BlackRock (link)
Institutional investors, such as those investing in multi-asset class hedge funds, play a significant role in shaping the business landscape by influencing the financial health of institutions and indirectly fueling market growth.
In an environment where the macroeconomic climate presents substantial risk, hedge funds with a multi-asset strategy tend to be better positioned to generate alpha compared to passively managed indices like the S&P 500, due to their diversification across different asset classes.
