Over the past year, we have taken an in-depth look at the universe of managers available in the Absolute Return asset class. Until recently, we used four managers: Caldwell & Orkin, Mainstay Marketfield, Ironclad, and Merger.
Caldwell & Orkin and Mainstay Marketfield employ long/short equity strategies, in which they seek to balance risk and return by taking both long and short positions in stocks. The goal is to profit from both sides of the market (stocks going up or down) and potentially reduce risk by shorting unattractive stocks.
Ironclad profits from selling put options on stocks.
Merger seeks to profit from market inefficiencies that can arise from corporate merger and acquisition activity.
The main reason we incorporate these strategies into our portfolios is because they tend to demonstrate low correlation to the equity and bond markets, resulting in lower volatility with equity-like returns.
After performing our due diligence, we decided to replace Caldwell & Orkin, Mainstay Marketfield, and Merger with AQR Style Premia.
There are several reasons for the change:
1. Mainstay Marketfield was more correlated to equities than we preferred, as high as 0.82 to a diversified basket of international stocks.
2. Caldwell & Orkin was less diversified because it only went long or short stocks and had a redemption period of 180 days.
3. Merger was difficult to drop, but when we looked at the mix of Ironclad and Style Premia, the data suggested we could achieve lower correlation and higher returns by dropping Merger.
4. To increase diversification within the Absolute Return category. Premia is designed to take advantage of academic “styles” that have been identified through decades of research and rigorous analysis:
a. Value – the tendency for relatively cheap assets to outperform relatively expensive ones
b. Momentum – the tendency for an asset’s recent relative performance to continue in the near future.
c. Carry – the tendency for higher-yielding assets to provide higher returns than lower-yielding assets.
d. Defensive – the tendency for lower risk and higher-quality assets to generate higher risk-adjusted returns.
5. We like AQR’s academic approach to building equity-like investment strategies.
AQR Style Premia invests long and short across countries and asset classes, seeking to capture equity-like returns while trying to hedge out risks of any one market or asset class. The fund will always be long and short stocks, bonds, commodities, currencies and equity indices.
We think the added diversification, lower correlation to traditional investments, and well designed investment strategy will improve the quality of your portfolios.