In addition, the regulatory environment may be somewhat more favorable now than it has been in the recent past. While the Trump administration’s policies toward antitrust enforcement are not completely clear yet, we expect to see a less restrictive environment in the near future. Moreover, high expectations for a corporate-tax overhaul helped to extend a stock market rally after Trump’s November election win. It also fueled speculation that a widely talked about measure that would encourage firms to repatriate cash held overseas would accelerate the pace of mergers as firms, particularly in the technology sector, looking for ways to spend that newly liberated cash.
The Case For 50/30/20
Similarly, the case for including an allocation to event-driven investing has changed as well. For many years, a 60/40 portfolio (60 percent equities, 40 percent bonds or similar fixed income securities) performed well. But several bear markets exposed limitations of the strategy to continue to produce strong returns. A growing body of research has many experts from the industry now advocating for a 50/30/20 portfolio, 50 percent equities, 30 percent fixed income and 20 percent liquid alternatives.
Due to the complexities of fixed income investing and global equity market volatility concerns, investors are increasingly demanding access to uncorrelated investment strategies that aim to provide stable returns with limited exposure to equity and debt market movements.
An analysis of portfolios that include increasing allocations to liquid alternatives bears this out. As illustrated by the chart below, adding an allocation to liquid alternatives improves Sharpe ratio. The Sharpe ratio uses standard deviation to measure an investment’s risk-adjusted returns. Higher Sharpe ratios indicate better returns relative to the amount of risk taken.
As part of a long-term strategic plan incorporating a mix of equities and fixed income, investing in a low volatility strategy such as event-driven can potentially minimize the drag of inflation and rising interest rates on bond and equity returns, while retaining the opportunity to compound positive returns over time.
Outlook
Event-driven investment solutions can play a key role in helping investors achieve long-term financial goals such as generating supplemental income, financing retirement and overall wealth preservation. The addition of a well-managed event-driven strategy, such as an event driven or merger arbitrage strategy, to a traditional, balanced portfolio has the potential to stabilize portfolio returns and reduce investment risk.
It would be timely to consider adding an event-driven diversifier as a “shock absorber” to an investor’s investment portfolio, particularly for those at or near retirement—who have less tolerance for volatility and capital losses—and who can benefit from the addition of a strategy which seeks absolute returns throughout market cycles.