When asked for money, WC Fields once said, "Sorry good man, all my money is tied up in cash."
Whenever there has been a large sell-off, many have announced that it is a buying opportunity. There is not denying that in a strong bull market, buying on dips makes sense, but what if this is a transition period? A sell-off does not have to be a buying opportunity, but rather a reallocation allocation period. As of the close on February 8th,
- Even with a year to date decline with the SPY (-3.46%), investors are up double digits on their SPY equity exposure since beginning of 2017, 18.20%.
- Even with a year to date decline in bonds as measured by AGG (-2%), investors are still up since the beginning of 2017, 1.55%.
- Balanced 60/40 stock/bond (SPY/AGG) blends are down for the year, (-2.88%) but still up since 2017 with returns of 11.54%.
This is the time to rebalance to long-term allocations if it did not occur at the end of the year and rebalance to alternative investments. Clearly, there are alternatives that have also been hit by the market sell-off. This is not surprising when there is a volatility shock and sell-off. We are not trivializing the losses but for alternative allocations, the issue is the construction of the portfolio or diversification benefits generated on a go-forward basis.
For systematic managed futures programs, the sell-off has led to selling of old positions, a repositioning of risk exposures, and a change in leverage to reflect the new environment. This restructuring is based on model signals not emotions. The transitions are usually not pretty, but the result is the potential for positive convexity in an investor's overall portfolio with allocations both long and short in a wide range of futures positions across a number of asset classes around the globe.
No comments:
Post a Comment