Global macro and managed futures come to the diversification rescue


Investors have seen a surge in market turbulence. There has been significant price dislocations and a rising flight to safety by many market participants since the beginning of the year. Consequently, it is important to look at strategies that may do well in this type of environment. Hedge funds, in general, will provide diversification protection because they have less beta exposure. Less directional risk will mean lower correlation with the overall markets, but that lower risk exposure does not mean hedge funds will be able to exploit opportunities from turmoil.

However, there are strategies that work well under market turbulence. Global macro and managed futures can do well during these difficult times as evidence by their past conditional returns. From "Hedge funds: The case for trading strategies" Picket Alternative Advisors SA shows the value-added from these divergence strategies in three ways. First, during periods of stress, managed futures will outperform direct beta exposure in equities. Second, correlations change during periods of stress. There is more diversification available at these critical times. The ability to go both long and short allows for negative conditional correlations with equity markets. Third, a combination of global macro and managed futures will do better than equity markets or hedge funds.

Of course, investors may not be able to predict when these crises or periods of turbulence will occur, but holding some exposure in managed futures and global macro will provide added portfolio diversification when needed.  These strategies offer more convexity to investors. We like to say they are anti-fragile.