Is it always about momentum but need style/factor diversification

 

There is a bandwagon effect with the momentum factor. The momentum factor performance is closely associated with cumulative flows into an asset or asset class. Still, these strategies do not last forever, which is why an investor should diversify their sources of alpha.

The simple case is to match the fundamental and systematic components to achieve a smoother blended return. 

Money flows and market behavior will change, and it is hard to find these turning points, so the first pass for effective factor management is to use more than one factor and ensure they show natural low correlation.

Volatility good for hedge funds

 

Volatility measures risk. It also measures uncertainty or at least variation in opinions on valuation. Volatility is an opportunity because, if a manager has skill, it should be shown when markets are more volatile. If you make the right decision, you will be paid more; if you are wrong, the pain will be higher. Macro hedge funds can go long and short across asset classes, so they should be able to take advantage of volatile markets. The visual supports that case. 

Volatility is an opportunity for distinction with a manager and strategy. 

The good and bad over the last 30 years

 

No region or asset class will always dominate the markets. Even the US stocks will underperform, as seen between 2000 and 2010. This is the core lesson of asset diversification. As shown in the table, the 60/40 mix will give you the median return. It will never outperform, nor will investors live to regret it. Should investors move out of their US exposure? Timing is never easy, so the most straightforward approach would be to use a trend-relative model to help. Money will flow toward better opportunities, but diversification remains the best approach to balancing risks in an uncertain world. 

The 60/40 plus portfolio still works

 

There has been a lot of bashing of the classic 60/40 stock-bond mix amid bonds' poorer performance. It provides a nice base middle ground for any portfolio discussion. If there is a market shock, it will rebound better than moving to cash and trying to time the addition of risk exposure.

Yes, using the 60/40 as a base anchors thinking, but it can serve as a good beginning for any portfolio construction.

Can investors do better? Yes, adding alternatives provides for a better return without adding volatility. The advantage of starting with the 60/40 blend is that it allows for a careful review of how to add new strategies to the portfolio. There is no major switching from risk-on to risk-off.