It’s a challenging market, but at APCM we believe that there are always solutions. Our team continuously scans the broader financial industry to find new opportunities for our clients. There are some key advancements that our investment team has been monitoring (which you can read about here and here), but the focus today is on the new tools APCM has available to help our clients achieve investment success and how we’re thinking about using these tools in your portfolio.
We’ll be covering some complex topics, but I promise I’ll do my best to stay out of the weeds. After all, Brandy reminds me that one of the differences between a good analyst and a great analyst is the ability to take something complicated and make it easy to understand. Here at APCM, with 7 CFA® Charterholders (the gold standard for investment professionals) on staff, we pride ourselves on doing this. Our goal is to deliver the highest quality investment advice and communicate it in a way that is meaningful to our clients. Plus, as an additional incentive to read all the way through, I do have an exciting announcement to share with you at the end of this post.
So with that out of the way, let’s dive into the fun stuff…
Investing in a Challenging Market
We’re in the later stages of a really good run. The U.S. stock market has been climbing for 9 consecutive years, which actually seems short compared to the 30+ year bull market in bonds. However, this has left us with elevated stock prices and low interest rates. It’s hard to find an attractively priced asset class.
APCM’s Tools for All Market Conditions
Fortunately, our team at APCM has tools that we can utilize given any market condition. While the core of your portfolio is the strategic asset allocation designed to meet your specific goals, there are “satellite” options that APCM uses to incrementally enhance return or reduce risk.
Those key advancements I mentioned earlier are creating interesting opportunities for our clients by expanding APCM’s satellite toolset.
Lowering Volatility Can Improve Returns
Right now, our team is looking at tools we can deploy to dampen portfolio volatility. We’ve been in an exceptionally low volatility regime, which is returning to more normalized levels. Investors should expect bouts of volatility at this late stage in the business cycle. This matters to your portfolio because reducing volatility can help protect wealth.
It’s important to remember that your investment plan was designed after evaluating all types of market volatility. But just because volatility is accounted for in your investment plan doesn’t mean we have to accept all of it if there is something out there APCM can use to help mitigate some of it.
Hedge Funds Can Lower Volatility
So what kind of tools is APCM evaluating? Hedge fund products. Hang in there with me and you’ll see why we’re looking at this now, and how these products can be compatible with APCM’s investment philosophy and principles (emphasize transparency, maintain liquidity, control expenses, etc.).
Hedge fund is a very broad term. Our team has summarized some key points below. Also included is a chart that describes the main types of hedge fund strategies and primary risks. Don’t feel bad if you skip the chart. It’s complicated, which is why you have a team of trusted advisors to navigate it for you.
- What is a hedge (according to Webster)?
- Limit or qualify (something) by conditions or exceptions.
- Protect oneself against loss on (a bet or investment) by making balancing or compensating transactions.
- A hedge fund is a private partnership that can use a wide range of investment techniques to dampen portfolio volatility and/or generate a consistent level of return, regardless of what the market does.
- Certain hedge fund strategies own publicly traded securities, but execute alternative trading strategies to capture sources of return that exist but are not emphasized, in traditional stock and bond portfolios.
Sounds pretty good (minus the leverage and shorting and all those other bad investment words), right? So why don’t more people own these?
The Hedge Fund Black Box
Historically, hedge fund exposure was limited to select qualified investors and high fees significantly eroded returns. Investors needed three key factors to have a successful investment experience.
However, those industry advancements I keep mentioning are opening the “black box” of hedge fund returns.
Industry Advancements and Opportunities
Research and innovation have created ways to access and understand these volatility dampening strategies in an Exchange Traded Fund (ETF) (for more about ETF liquidity and transparency, click here). It’s the best of the old hedge fund return that is delivered to investors in a new wrapper.
While hedge fund beta for all investors might sound too good to be true, this isn’t a fad or a scam. This is simply industry evolution. Academic research supports the fact that certain hedge fund strategies can be replicated, which is where APCM’s team has focused our efforts.
More to Come
APCM has identified a fund that is able to capture the benefits of a hedge fund and is preparing a formal recommendation. We recognize that portfolio contribution and funding are key to utilizing these products to mitigate risk without sacrificing return, so we are taking our time with this final step in the due diligence process. Your financial advisor or client relationship manager will discuss product details with you after we issue our conclusion.
And now for the big announcement… APCM will be releasing a white paper to document our research and provide academic support for our portfolio recommendation. It’s going to be granular as all get out, and I couldn’t be more excited! All the weeds that our marketing team trimmed out of this post will certainly be included in the paper. Keep your eye out for its release if you’re a nerd like me and happen to be interested in the nuances of merger arbitrage and fascinated by how regulatory constraints impact replication capabilities. We’re looking forward to sharing our work with you soon!