especially if you are already “diversified” to lessen the blow of a market correction? The reality is that most portfolios are short volatility and will continue to perform well as long as the market is going up. However, if volatility should rise in any meaningful way, the losses to investors, especially retirees, could be quite painful. The ARS is always long volatility, which means that if we should experience significant volatility, the ARS will actually benefit.
Unfortunately, due to the heavy cost of holding insurance (a critical problem solved by the ARS positive carry), it is not feasible for most portfolios to protect with direct hedges. The main approach used to protect wealth is to diversify into assets that hopefully will go up if the market drops, i.e. bonds.
What happens, though, when you combine a bull market ripe for a major correction together with historically low interest rates anticipated to rise? The reasonable assumption is that at some point, stocks and bonds will simultaneously drop in value. How do you prepare for such a scenario?
At IPS, we do not attempt to predict or time, and we know it is too late to put on a seat belt after a crash. We are hedged all of the time, and our asymmetric risk profile enables our investors to participate in the upside while always protecting against the downside. If fact by simply altering the traditional 60/40 portfolio mix by adding the ARS, you can significantly strengthen, truly diversify, and reduce risk within a portfolio.
Here are comparisons of a 60/40 mix (SPY/AGG) and a 50/30/20 mix (SPY/ARS/AGG) with the ARS added, as well as a 100% ARS position.
The performance data shown in this presentation represents past performance data. The Absolute Return Strategy performance is representative of a size-weighted composite of the accounts managed by the firm classified as the Absolute Return Strategy-Moderate composite. The returns represent net returns of clients invested into the strategy, accounting for the 1% annual management fee. Please note that all performance in 2011 represents one non-fee-paying account comprised of the firm’s capital. Due to the nature of composite performance, it cannot be guaranteed that an investor in a specific composite will receive the same gains as the size-weighted average of the composite. As of April of 2016, the separately managed accounts in the ARS-Moderate composite gain their exposure to the ARS through a 40 Act fund that utilizes the Absolute Return Strategy. The performance of the ARS shown on this sheet still represents the size-weighted average of the SMA’s that are part of the ARS-Moderate.
The performance of the SPY represents the SPRD S&P 500 ETF Trust and includes management fees and dividends.
The performance of the AGG represents the iShares Core U.S. Aggregate Bond ETF and includes management fees and dividends.