![]() ![]() This results in investors raising capital from relatively cheap assets (discounted equities) while maintaining positions in hedge funds that did not significantly decline to meet any cash needs.Īccess to cash should be factored into the objective of downside protection, and the liquidity of the “hedge” must match the need for cash. While many hedge funds control losses during equity market drawdowns, withdrawals may be unexpectedly limited during these times. Many investors fail to include liquidity concerns when attempting to protect their portfolios from downside risks. We believe the positives for these strategies outweigh the negatives. Since there is no “free lunch,” the higher volatility profile of systematic strategies may be the cause of portfolio drawdowns, as well as protection against them, depending on the market environment. Systematic funds provide diversification benefits to traditional portfolios because they have average realizable returns above the beta-adjusted market return and are expected to positively contribute to portfolio performance over time. However, from 2011 through early 2014, they contributed significant negative returns to portfolios before rebounding in late 2014 through early 2015. During the financial crisis, they were highly liquid, had limited equity exposure and performed well. For instance, many liquid systematic funds (trend-following and other related strategies) provide the first and second kinds of downside protection. ![]() ![]() The decrease in downside risk without sacrificing realizable return cannot be the result simply of a beta substantially below one, and may not be present in all volatile markets. ![]()
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