In late October, Levitt says a typical client portfolio was up 25% after a 16% decline in 2008, when returns in foreign investments were hurt by a flight to the greenback. U.S. equities accounted for only 10.5% of the portfolio, while South America (mostly Brazil) represented 6.8%. European stocks were 8.5% and Chinese equities were 15%. However, his clients have investments in Israel, Iraq, India, Canada, Russia, Qatar and Pakistan, among other places.
Levitt says he is quick to lighten his exposure to stocks if the markets go against him. "If my clients want to get out, we'll get out," he explains. "If the markets look scary, we'll get out, even if we are wrong."
Solutions in the absolute return space are all over the map. Sanjay Yodh, managing director of alternative strategies at Rydex SGI, says his firm is broadening the suite of products to allow advisors and their clients the ability to manage risk more effectively.
Each of Rydex SGI's products-managed futures, commodity long-short and multi-hedge fund of funds-have different risk/return profiles. "It's very important for investors to focus on risk management, and we believe many alternative products can help mitigate loss," Yodh says. "These strategies need to be flexible enough to capture returns in any type of market by utilizing all the levers available, which include being able to go long, short, hedging, etc."
Caveats Galore
Advisors relying on absolute return strategies for the lion's share of clients' portfolios acknowledge that, while clients were delighted in 2008 to suffer losses in the low teens, they've started to voice discontent since many major indexes have soared 50% or more since mid-March. Some observers think they've seen it all before.
"A lot of what people were wearing for a philosophy was merely an outlook," declares Nick Murray, editor of the electronic newsletter Nick Murray Interactive. "This is precisely why you find advisors significantly altering their approach, through 'tactical asset allocation' (the world's smelliest euphemism for market timing), shorting, option writing and various other return-reducing devices: What they thought was a philosophy was merely a mistaken notion of how the world works, and/or the absence of a sufficiently adult memory. Now those advisors are going to punish their clients for what they (the advisors) still haven't learned.
"As with the other two major episodes of a decade of no equity returns in the last hundred years (the ones that ended in 1935 and 1974), I suspect you will now see a protracted period of above-average returns, with trailing ten-year returns cycling back up toward 20%, as happened in both other instances," Murray continues. "Marty Zweig famously said that the market will always figure out a way to disappoint the largest possible number of people, and my hunch is that the most bitterly disappointed advisors and investors over the next block of time will be those who are just now shrilly excoriating the 'outdated' notion of buy-and-hold."
Leading practitioners of absolute return investing understand where Murray is coming from, even if they are somewhat more agnostic in their outlook. Putnam's Knight views absolute return as "a complement," to other holdings in an investor's portfolio, not a substitute for them.
And AQR's Asness sees the danger of reading too much into the events of 2008. "Investors of all types tend to overreact to the relatively recent past, particularly to what's happened over, say, the last three to five years," he says. "If over this time frame, long-only strategies outperformed absolute return, investors would probably favor them more than usual. Sadly it would probably be the precise time to do the opposite."
In the interest of disclosure, many of the sources quoted in this article, including Nick Murray, Michael Martin, Cliff Asness and Lou Stanasolovich, do write or have written for Financial Advisor magazine.