- Robert Sinnott, a portfolio manager at AlphaSimplex Group, subsidiary of Natixis GAM, discusses crisis alpha, diversifying factors, daily liquidity, and fees
- "In terms of an investor’s overall portfolio, if you are thinking about when to enter and exit a strategy that itself is figuring when to enter into and exit out of a market, you are going to compound your challenge"
- "Because managed futures strategies generally trade liquid futures and forward contracts, they may not be exposed to the illiquidity costs and concerns of many other alternative assets or alternative strategies"
Managed futures strategies have demonstrated the ability to maintain diversifying characteristics when most needed, in a market crisis. In this interview with Robert Sinnott, a portfolio manager at AlphaSimplex Group, subsidiary of Natixis GAM, he discusses crisis alpha, diversifying factors, daily liquidity, and fees. But first, he explains why “the trend” has been his friend during the first few months of 2016.
2016’s market environment has been bumpy. How has your managed futures approach behaved?
We follow a trend-following strategy across global stocks, bonds, currencies, commodities. So in 2016, where the S&P 500 has gone down more than 10% and then come back up, it has been a time when trend-following strategies have shown their diversification benefits. These gains have come from multiple asset classes, including going both long and short in global currencies and both European and U.S. fixed-income.
How do you know when to get in and when to get out?
This systematic trend-following strategy is fundamentally a dynamic asset allocation strategy. We are figuring out when to go long markets and when to go short based on market momentum. We use a mix of quantitative models that track price trends in global markets over short-, medium-, long- and variable time horizons. When the models indicate an up-trend in a particular market, that signals a time to buy that asset; likewise, down-trend indicators will signal a time to sell and often go short these assets.
In terms of an investor’s overall portfolio, if you are thinking about when to enter and exit a strategy that itself is figuring when to enter into and exit out of a market, you are going to compound your challenge. What we find for managed futures, especially trend-following strategies, is that they serve as a long-term diversifier for overall portfolios. Also, I think having a strategic allocation approach rather than a tactical allocation approach makes more sense. If you try to time it, you have a good chance of missing the benefits, as we saw in January of this year. By the time you got in, most of that advantage was probably already experienced by the current holders.
Is liquidity ever an issue?
Because managed futures strategies generally trade liquid futures and forward contracts, they may not be exposed to the illiquidity costs and concerns of many other alternative assets or alternative strategies. Now, while it is possible that a futures market might become illiquid, this is much, much less likely to occur than we might see in other alternative strategies.
What is crisis alpha, and how important is it to ASG?
Crisis alpha is a very, very important concept. It’s actually a differentiating feature for managed futures relative to many other alternative asset classes. Some trend-following strategies have not only provided positive returns during most historical crisis periods, but they actually seem to provide additional positive return during these periods of crisis in excess of their average return in other market environments. This tendency is known as crisis alpha. I should point out that even strategies that have strongly documented historical crisis alpha may not provide positive returns in every crisis and that past results are not indicative of future results. Nonetheless, over the long term, we think strategies that exhibit crisis alpha may serve as a good diversifier in a portfolio, because they may provide returns when other investments are contributing to losses.
When we think of managed futures strategies as a group, it’s important to understand that not all managed futures strategies do the same thing. It depends on what approaches a particular strategy employs. Some focus in on very short-horizon trend signals, while others will only track very long-horizon trends. Still others, including AlphaSimplex, follow short-, medium-, and long-horizon trends, trying to get a more diversified approach.
Can you talk more about the diversifying factors of your strategy?
Because the ASG managed futures strategy considers global stocks, bonds, currencies and commodities, we have many different opportunities to follow throughout the world. We consider everything from the South African rand and the Mexican peso to the German Bund to the U.S. 10-year and beyond.
When we are looking at the positions and how the strategy moves, we get diversification from a broad asset set of liquid exchange-traded futures and currency forward contracts. Diversification also comes from being able to go both long and short in each of these contracts.
So this translates into a true diversifier for investors’ overall portfolios?
Yes, I believe so. A managed futures strategy has the potential to diversify investors’ portfolios in three ways. First, you have the potential for strong performance in down markets. Second, low to non-correlation with other asset classes. And finally, you gain exposure to more types of assets that may help your portfolio even in non-crisis periods.
Higher fees are often associated with managed futures strategies. Why is that?
Well, first of all it’s important to think about what goes into these strategies in terms of infrastructure and trading. We have a 24-hour trading desk that trades in all of the global markets. In addition to that, you have to remember these strategies first came out in the hedge fund area, which has considerably higher management fees.
What type of allocation should investors have in their portfolio?
Obviously it is important for investors to work closely with an investment professional to arrive at the right amount for their portfolio. But, for investors with a large equity allocation, it might make sense to have a meaningful managed futures component in their portfolios because of that propensity of managed futures to provide crisis alpha, as well as diversification from equity risk.
RISKS: Diversification does not guarantee a profit or protect against a loss. Managed futures strategies use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors. Commodity trading involves substantial risk of loss. Futures and forward contracts can involve a high degree of risk and may result in potentially unlimited losses. Short selling is speculative in nature and involves the risk of a theoretically unlimited increase in the market price of the security that can, in turn, result in an inability to cover the short position and a theoretically unlimited loss.
In Latin America: This material is provided by NGAM S.A., a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier (CSSF) and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of NGAM S.A.: 2 rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. The above referenced entities are business development units of Natixis Global Asset Management, the holding company of a diverse line-up of specialized investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Global Asset Management conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorized. Their services and the products they manage are not available to all investors in all jurisdictions. This material is provided by NGAM Distribution, L.P. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions. Past performance is no guarantee of, and not necessarily indicative of, future performance. 1483285.1.2