When rising interest rates and inflation risks weigh on potential market returns, allocation to one alternative may not be sufficient to diversify client portfolios—but multi-alternative strategies could offer some protections.
Some market commentators are painting a putrid picture of traditional asset classes like stocks, bonds and cash. Propelled higher by market momentum, developed market stocks tend to be expensive, dampening expectations for forward returns.
Bonds, on the other hand, have been caught in a long period of low yields, and gradually rising interest rates eat away at the value of investors’ fixed-income assets.
“The house view is that client portfolios already have plenty of fixed-income risks embedded in them, so the goal of a multi-manager strategy is to diversify out that exposure by adding something different,” said Brian Murphy, portfolio manager at Vivaldi Capital Management, a Chicago-based assets manager.
Murphy, who will speak at the 9th Annual Inside Alternatives and Asset Allocation conference, running from September 24 to 25 at the Wynn Las Vegas, is on the management team for the Vivaldi Multi-Strategy Fund (OMOIX), a $73.7 million fund that allocates to four different alternatives strategies: a long-short equity strategy with no directional market exposure, a closed-end fund arbitrage relative value strategy, an announced deal merger arbitrage strategy, and an uncorrelated legacy non-agency structured credit strategy.
OMOIX offers low correlations to the S&P 500 and the Bloomberg Barclays U.S. Aggregate Bond Index. Vivaldi also selected strategies with low correlations to one another. As a result, each part of the portfolio is capable of producing mid-single digits on its own, said Murphy, with no overlapping risks.
As of August 8, OMOIX had offered investors five-year average annualized returns of 3.27 percent, according to Morningstar, and that’s after the fund’s 3.48 percent expense ratio has taken a large bite out of the fund’s potential performance.
Most multi-strategy and multi-asset alternative strategies were developed after the 2008 global financial crisis to allay investor concerns about diversification and lower returns, said Jai Jacob, managing director and portfolio manager at Lazard Asset Management.
“In high volatility, low momentum environments, multi-asset strategies are more useful,” said Jacob. “When the market is down 10 percent, multi-asset might be down 2 or 3 percent, and the power of compounding works for the investor.”
On the other hand, when markets are on a tear, as they were in 2017, multi-alternative strategies tend to underperform, said Jacob, who co-manages Lazard’s Real Assets and Pricing Opportunities strategy, which includes liquid real assets like REITs, infrastructure companies, inflation-linked bonds, commodity futures and companies affected by commodity prices and inflationary trends.