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The quest for diversification: Liquid alts opportunities
Alternative risk premia in practice
- Carry: Positive expected return if everything stays the same; Buying high yielders, selling low yielders
- Value: Buying cheap assets, selling expensive ones
- Trend/Momentum: Long absolute positive performer, short absolute negative performers
- Quality: Buying high quality assets, sell lower quality assets
- Volatility: Implied versus realized; Selling insurance
- Alternative Carry: Repo arbitrage, dividend arbitrage, liquidity premium
- Alternative Value: Structural trading imbalances linked to flows
- Trading Pattern: Higher frequency strategies
- Hedges: Linear pay offs using standard derivatives
- Tall Risk Hedges: Convex pay offs using volatility derivatives
Equity volatility: Harvesting yield in a minefield
Returns from selling one-month VIX futures to harvest volatility risk premium
Source: Bloomberg, BMO Global Asset Management, as of August 20, 2020. Past performance should not be seen as an indication of future performance.
Machine learning: A new hope
Multi-alternative risk premia
Source: Société Générale, Bloomberg, BMO Global Asset Management, as of August 20, 2020. Past performance should not be seen as an indication of future performance.
Tail-risk hedging: Magnifying returns when fear is unleashed
The balanced fund of the future likely includes liquid alts
The secular trend of falling interest rates is approaching its limit as global rates have converged at the zero floor or fallen outright below it. 60/40 investors are increasingly likely to use liquid alts to help offset the loss of yield from the fixed-income portion of their balanced portfolio.
Implementation of liquid alts has been helped by the modernization of investment regulations in most jurisdictions. What was once accessible only to high-net-worth investors is slowly becoming available to retail investors, though high-leverage strategies will likely remain the exception.
The strategic and tactical opportunities within the liquid alts universe are vast. For a more traditional long-term investor, the best approach is probably a robust and diversified alternative sleeve designed to complement a core portfolio of stocks and bonds. Such a portfolio is likely to better weather the challenging market environments of the future.
Disclosures
This material is intended for institutional/professional investors, the investments and investment strategies discussed are not suitable for, or applicable to every individual. Investing in alternative investments presents the opportunity for significant losses, including the possible loss of your total investment. Such strategies have the potential for heightened volatility and in general, are not suitable for all investors.
This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This presentation may contain forward-looking statements. “Forward-looking statements,” can be identified by the use of forward-looking terminology such as “may”, “should”, “expect”, “anticipate”, “outlook”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof, or variations thereon, or other comparable terminology. Investors are cautioned not to place undue reliance on such statements, as actual results could differ materially due to various risks and uncertainties. This publication is prepared for general information only. This material does not constitute investment, tax or legal advice to any party and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested.
Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties. Investing in emerging markets can be riskier than investing in well-established foreign markets.
Past performance is not necessarily a guide to future performance. Asset allocation and diversification do not ensure a profit or guarantee against loss.
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