Stern says GARS is designed to be highly scalable. “Our philosophy is to exploit macro ideas in a tradable way through positions that are highly liquid,” he says. “Strategies involving government bonds, currency positions or equities at the index level can be implemented in extremely large size and do not constrain capacity.” He added that the fund also has ample backup from over 50 professionals whose expertise spans a wide range of disciplines and asset classes. 

There are also some issues with the multi-alternative asset class itself. Many investors are used to measuring an investment’s success against established benchmarks, and it’s hard to find one that fits here. As a group, multi-alternative funds haven’t been all that successful, and most of them are relatively new. Returns have also been dragged down by a hefty average expense ratio of 1.65%. (At 1.33%, the Hancock fund’s institutional class shares expense ratio is below average.)

The John Hancock Global Absolute Return Strategies Fund’s 1.73% return in 2015 beat 93% of its multi-alternative peers as its bets on a strong dollar panned out, and Stern was nominated for Morningstar’s “Fund Manager of the Year” in the alternatives category. But the fund also suffered the worst quarterly loss in its history in the first three months of 2016, when it fell 3.46%. Much of that loss came from long positions in European and Japanese equities, which sank during the period, as well as positions betting on the strength of the U.S. dollar over other currencies. 

“A Modest Global Recovery”

For Stern, the major challenge is putting together a blend of investments where positive returns consistently outweigh negative returns. The tool box for investment and hedging purposes includes listed equity; equity-related and debt securities; and derivatives such as futures, options, swaps and foreign currency forward contracts. As an added precaution, the fund runs hypothetical stress tests under possible future economic scenarios to assess how the portfolio would react under a variety of market conditions. Such scenarios might include a full-blown crisis in China, or a period of stagflation in the U.S.

Investment opportunities fall into one of three baskets. Market returns come from traditional long positions in equity, credit or other markets that the managers believe will rise. Directional strategies encompass long and short positions in currencies or other markets. And relative value strategies involve pairing related markets or securities and profiting from the difference in their performance. 

“While we have a clear perspective on the level of equity beta or total duration we have in our portfolio, we really don’t think about the fund in terms of traditional asset allocation,” he says. “Instead, we assess the portfolio at the individual investment level to understand how strategies interact with each other, and think about what would be the best blend of our investment opportunities.” Asset allocations are determined by each investment’s expected return over three years. 

In funds of this kind, making the right macroeconomic calls is essential, and Stern and his team have been better at it than most. Expectations for a modest global recovery, albeit with regional variations, guide the fund’s current investment strategy. Continued Fed rate hikes in the U.S. and the slowing Chinese economy will both be powerful forces shaping asset returns, while in Europe and Japan central bank actions continue to hold sway over markets.

Many investments focus on the divergence in economic recovery cycles around the world. Stern prefers to invest in stock markets where central banks and governments are encouraging growth through measures such as low interest rates and increased money supplies. Those conditions apply in Europe and Japan, two places where the fund is long in equities. By contrast, the U.S. is further along in its recovery phase and is at a point in which bond prices could fall as interest rates rise. With that in mind, the fund is using a variety of financial instruments that effectively short long-term U.S. bonds. That strategy worked well in the first quarter of 2016 as a slight recovery in oil prices sparked concerns about renewed inflation. 

On the currency side, the fund has lined up positions that would profit from a strengthening U.S. dollar against a number of currencies. Because China’s economic struggles have created difficulties for other Asian countries, the portfolio is short in a number of Asian currencies, particularly the Korean won. And while emerging markets have been badly beaten over the last few years, there are some pockets of opportunity—such as the Indian rupee (as a long play) and Mexican government bonds. 

One of the fund’s relative value positions involves pitting a long position in U.S. technology stocks against a short position in U.S. small-cap stocks. Stern believes that tech stocks are a better value and have more realistic earnings expectations than small caps, which tend to issue overly optimistic forecasts. 

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