Why Alternatives Are Important - II

| April 25, 2018
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And not just as a hedge against rising interest rates, but also against stock gyrations.

For today’s note we are going to focus on how hedge funds perform versus stocks during periods of sustained Fed tightening, like the one we are in now.

A wise reader asked what the data looks like versus stocks, as a recent post focused on performance versus bonds.

This research comes from Grosvenor Capital Management. Yes they are one of the oldest alternative managers in the world so they may be biased but let’s just look at the data.

For illustration purposes we are just looking at indices. In this example we are utilizing the following:

  • Hedge Funds = HFRI Equity Hedge Index
  • Fixed Income = S&P 500 Index

There have been four distinct periods of Fed tightening:

  • Period 1: 02/1994 to 02/1995 = 7 Hikes of 300 basis points
  • Period 2: 06/1999 to 05/2000 = 6 Hikes of 175 basis points
  • Period 3: 06/2004 to 06/2006 = 17 Hikes of 425 basis points
  • Period 4: 12/2015 to Now = 6 Hikes of 150 basis points

Here is the differential between hedge funds and bonds:

  • Period 1: -2.21% HFRI Equity Hedge Index UNDER S&P 500 Index
  • Period 2: +22.69% HFRI Equity Hedge Index OVER S&P 500 Index
  • Period 3: +6.41% HFRI Equity Hedge Index OVER S&P 500 Index
  • Period 4: -14.30% HFRI Equity Hedge Index UNDER S&P 500 Index

As always past performance is not indicative of future results. These are cumulative results and you can’t invest directly in indices.

This is food for thought as we find ourselves in a new volatility regime.

The above data also shows why hedge funds and alternatives are out of favor. They have underperformed during the current bull market and higher interest rate regime.

Overall, alternatives have historically fared well during rising interest rate environments by outperforming bonds and keeping pace with stocks.


Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R = O


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Meyer Capital Group), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Meyer Capital Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Meyer Capital Group is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Meyer Capital Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

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