A Forgotten Fall and an Unforgettable December
In the lead-up to the holiday season, Jim Neumann, Partner and Chief Investment Officer at Sussex Partners, is advocating for a strategic shift in hedge fund positions. The goal is to focus on strategies with less equity directional exposure and to increase exposure to adaptable strategies for a less bullish environment.
This recommendation comes after a period of optimism among hedge fund managers in late 2018, when improved market conditions were anticipated. However, the market downturn that followed, particularly in October 2018, surprised many, causing a spike in volatility and a subsequent period of dispersion in assets, strategies, and managers.
The damage from the market downturn spread despite periodic relief rallies, and allocators and advisers who shifted portfolios into a more protective stance generally did not produce a positive return. This experience has led to increased scrutiny of hedge funds' ability to consistently provide downside protection, leading some investors to question fees relative to protection benefits.
In a risk-off scenario, the market turn started out as idiosyncratic events but quickly spread, with correlations increasing daily. As a result, there is increasing dispersion, directionality, and more normal levels of volatility across global markets, including equities, credit spreads, rates, and commodities.
However, a carefully constructed, thoughtfully diversified basket of non-correlated strategies worked during the latest market tempest, as measured against most metrics other than absolute return. These strategies, such as market-neutral, long/short equity, or volatility-based hedging, seek returns that are less correlated to general market movements, attempting to provide downside protection during periods of heightened volatility.
Despite the mixed success of these strategies during the October-November 2018 market downturn, the author believes that limiting equity exposure is important to manage risk in the short term. The goal for the holiday season is to focus on strategies that can provide some level of protection while still aiming for returns.
It is important to note that the author's views in this article do not necessarily reflect the views of AlphaWeek or The Sortino Group. All rights for the publication are reserved by The Sortino Group, and reproduction, storage, or transmission of the publication requires written permission from the publisher.
This article is a guest article for Hedge Funds in AlphaWeek, published by The Sortino Group.
[1] For precise quantitative performance metrics and strategy-specific outcomes from October-November 2018, more targeted financial industry reports or hedge fund performance databases from that period would be required, as recent 2025 sources focus primarily on hedge fund allocations and current market views rather than detailed historical performance analysis.
- In view of the market downturn in October 2018, Jim Neumann, the Chief Investment Officer at Sussex Partners, is advocating for active management in finance, encouraging a strategic shift towards strategies with less equity directional exposure and increased exposure to adaptable strategies for a less bullish environment.
- With the aim of managing risk in the short term and providing some level of protection while still aiming for returns, the author suggests focusing on investing in business strategies that can provide returns less correlated to general market movements, such as market-neutral, long/short equity, or volatility-based hedging strategies, during the holiday season.
