A few days ago I stumbled across a post from CIO titled Reports Of My Death Have Been Greatly Exaggerated that chronicles the outflows from hedge funds last year and posits whether a comeback might be around the corner but with generally lower fees. The lower fee angle of the article seemed to focus on negotiating a lower fee with the manager. Of course lower fees are available through the various exchange traded products that one way or another replicate the exposure but doing so without the so called ‘2 and 20’ fee structure.
My view on this has been the essentially the same for quite a while which is that the replicators are one of several diversifiers that can tactically be added to a portfolio to reduce correlation at times in the equity market cycle where it makes sense to look less like the equity market like when it is rolling over into a large decline. My indicators for this are the S&P 500 going below its 200 day moving average, the slope of that 200 DMA being negative, the yield curve inverts (not likely to happen whenever the next bear market occurs) or one sector of the S&P 500 grows well past 20% of the index.
Most of the time equities go higher and so you probably don’t want to stray too far from an equity allocation…most of the time, but a little exposure to diversifiers does make sense when the market is going higher because there is no way to when the market will turn.
At this point in one of these posts I might talk about not expecting one of the replicators to necessarily keep up with equities but that they can zig when the equity market zags but I recently found the following chart:
Long/short is obviously just one strategy in the hedge fund realm and clearly there is no way to know what future results will be but the return and volatility numbers reported in the chart would seem to say that this space should be investigated further if you have not been using some form of hedge fund replication as part of your strategy for diversifying your equity exposure.
Taking some sort of defensive action or otherwise employing some sort of tactical shift in the portfolio as I described above and have been writing about since I started the blog will not be suitable for everyone but my experience with this has been good enough to still believe in it. Whenever the next decline comes not every possible strategy will “work” which to me is an argument for several different alternative strategies. The equity market is still doing well which makes now a good time learn about this subject.
*Morgan Creek Capital is the sub-advisor for the AdvisorShares Morgan Creek Global Tactical ETF (GTAA)
AdvisorShares ETF Strategist Roger Nusbaum wrote this article.