What is the point (of a Hedge Fund?)
I have heard this asked many times lately – especially in light of the equity market charging higher – seemingly with no end in sight.
Most investors, both retail and institutional, have significant concentrated equity exposure. Since 2007, a typical 60-40 portfolio has a 95% correlation to the S&P500. Even more diverse public institutional portfolios we have witnessed have correlations as much as 85%.
Being long equity has worked and perhaps the equity tilt is the right path for the next X years. Who are we to judge –maybe the equity market is the upside opportunity that can’t be missed. But how do you justify the risk?
When I sit down with clients and prospects, I am very up front. We don’t make money every month, or every quarter, or even every year. After gaining over 40% in 2008, our returns lag the S&P. What we hope to do is make money when you need it most. We give you comfort to do what you are doing knowing we have your back by improving your portfolio.
Overlaying the benchmark Auspice Managed Futures Index (as published by the NYSE), we can see that a 20% allocation doesn’t take away the upside opportunity at all. It improves not only absolute returns, but also reduces relative risk (23 % lower volatility, 40% less drawdown).
Is it insurance? Kind of - but unlike pure insurance, which is statistically a negative investment return for the consumer, we have a positive expected value over time. Not all the time, but over time and hopefully when you need it. It is not just in years like 2008 that you need help: it is also in recovery post crisis in 2010, in the volatility of 2014, and the shifting economic and political landscape of 2016.
While the stock market marches higher, and you ask yourself, “why would I ever consider a hedge fund asset like Auspice?” Remember that diversification and downside protection make a portfolio better. When you need help, we are (historically) there for you and your portfolio. And in the good times of equity bliss...we aren’t too much of a drag.
So what is the point? The point is to be able to keep doing what you are doing but having some piece of mind. Upside Opportunity and Downside protection. Don't try to time this as the best time to add non-correlated returns is right now.
Disclaimer
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
COMPARABLE INDICES
Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.
Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).
60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.
QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.
For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.
Term January 2007 to May 2017