A Forgettable Fall and an Unforgettable December?
October 2018 was a month of surprises for the equities market, causing a stir among hedge fund managers who were expected to put up solid numbers and reclaim their higher fee throne. However, the effects of this market meltdown on non-correlated hedge fund strategies, such as Trend Following systems, have not been extensively covered in the search results.
Trend Following systems, designed to be non-correlated with traditional equity and bond markets, often perform relatively well in volatile markets like October 2018. These strategies identify and follow persistent price trends across various asset classes, allowing them to go short or reduce risk exposure quickly during a market sell-off.
In such market "meltdowns" or corrections, Trend Following funds can help hedge overall portfolio drawdowns by either generating positive returns or minimizing losses when stocks and bonds decline simultaneously. This is due to their dynamic risk management and ability to capture asset price momentum regardless of direction.
Traditional portfolios, like the 60/40 equity/bond mix, typically experienced significant losses in October 2018, with equities down by roughly 10%. In contrast, certain non-correlated strategies, including some Trend Following funds, preserved capital better or even outperformed during that period.
As we move forward into a more volatile and less bullish investment environment, a carefully constructed, thoughtfully diversified basket of non-correlated strategies is suggested. It is important to limit the equity exposure within this basket, as getting the direction correct in the short term can be quite difficult.
Investors need to take action leading into 2019 to move some portion of their traditional or alternatives exposure into non-correlated protective strategies. At Sussex Partners, they have long-favoured newer technology trend systems that include more thoughtful entry/exit points and risk control.
Jim Neumann, Partner and Chief Investment Officer at Sussex Partners, emphasizes the importance of such a shift. Advisers who had been attempting to shift portfolios into a more protective stance fared better, but generally did not produce a positive return.
As we approach the end of the year, the question for December is 'What now?' for those who added strategies that are non-correlated to the major markets. It is recommended to focus on those strategies that have less equity directional exposure, which is believed to remain problematic.
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In conclusion, while the October 2018 market meltdown was a challenging period for many, non-correlated hedge fund strategies like Trend Following systems may have provided a degree of protection and even outperformed traditional portfolios during that time. As we navigate the current and future market volatility, a diversified approach that includes such strategies could be beneficial.
Active management of investments involving finance and business could be more advantageous in the current market volatility, especially considering the past market meltdown in October 2018. Trend Following systems, a form of active management, were not only designed to be non-correlated with traditional equity and bond markets but also seem to perform relatively well during such periods of volatility by going short or reducing risk exposure quickly when necessary.
