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RISK MANAGED U.S. GROWTH
RETHINKING ALL-WEATHER EQUITY PORTFOLIO DESIGN

OBJECTIVE

Mandate first implemented in Q4 2020

The strategy seeks to provide resilient, “all-weather” exposure to U.S. equities by embedding a diversified set of risk management techniques, including: systematic equity tilts; ensemble trend following; option-based hedges for left and right tails; and a U.S. Treasury futures overlay.

STRUCTURE


ARE THE TAILS GETTING FATTER?

Realized returns in U.S. equity markets have become increasingly fat-tailed over the last two decades.  The abnormal calm of 2017 and the chaos of March 2020 are symptoms of the same, underlying changes.

Our white paper Liquidity Cascades explores the drivers behind this change, including central bank intervention, the rise of indexed investing, and the growth of volatility-contingent strategies. 

Together, they paint a picture of an increasingly volatile market environment, punctuated by melt-up and melt-down dynamics.


BEYOND FIXED INCOME

For the past thirty years, investors have been able to rely on fixed income for yield, capital preservation, diversification, and even a hedge during crisis periods.

With little income remaining from yield (a strong predictor of low future returns), and rates hovering above the zero bound (suggesting that they would have to go negative in a crisis to offer the same protection as prior crises), we have to consider the opportunity cost of hedging equities with fixed income.

That is not to say that bonds cannot remain a wonderful diversifier within a portfolio, but we believe that investors should look to access them in a more capital efficient manner.


“RISK CANNOT BE DESTROYED, ONLY TRANSFORMED”

In addition to diversifying across assets, investors should also diversify across how they manage risk.  No single risk management technique is a panacea.  Each approach may be effective or ineffective in different environments and offer varying degrees of protection provided, reliability, and cost.

When faced with uncertainty, we believe investors should diversify their diversifiers.

Most Effective

Least Effective

U.S. Treasuries

Flight-to-safety

Rising rate environment


Trend Following

Prolonged trends

Rapid reversals


Alternatives

Non-trending markets

Coincidental drawdowns


Tail Hedges

Sudden drawdowns

Shallow declines


STRATEGY BUILDING BLOCKS

Growth (33.3%)

  • Momentum equity tilt that seeks to buy stocks that have recently out-performed their peers.
  • S&P 500 Index call options.

Defense (33.3%)

  • Defensive equity tilt that seeks to purchase stocks with low statistical risk (e.g. volatility) and high-quality characteristics.
  • S&P 500 Index put options.

Trend (33.3%)

  • Dynamic S&P 500 exposure driven by an ensemble of trend signals.
  • Sleeve dynamically tilts between 0- and 33.3% equity exposure, adjusting overall portfolio beta.

Overlay (0-100%)

  • Dynamic U.S. Treasury futures exposure.
  • Dynamically tilts between 0- and 100% notional exposure.
  • Driven by quantitative trend, value, and carry signals.

Sleeve sizes are approximate targets and do not account for collateral required to hold U.S. Treasury futures positions.


Participation for the Right Tail

  • Momentum tilts seek to generate alpha.
  • Trend following seeks to increase portfolio beta in positively trending markets.
  • Call options seek to create convex participation during sustained market rallies.
  • Treasury futures seek to add a second, diversifying source of returns.

Protection for the Left Tail

  • High quality, low volatility tilts seek to preserve capital.
  • Trend following seeks to decrease portfolio beta during negatively trending markets.
  • Put options seek to create convex protection during market declines.
  • Treasury futures seek to benefit from “flight-to-safety” in fixed income.

For Performance/Fact Sheet and presentation material, please contact us.