The global economy is steadily improving and markets continue to strengthen, but this may leave many investors open to potential shocks that could drag on investment portfolios. Consequently, investors may consider an alternative exchange traded fund strategy to hedge against potential risks.

On the recent webcast (available on-demand for CE Credit), An Alternative to Diversify ETF Portfolios, David Lebovitz, Global Market Strategist for J.P. Morgan Asset Management, pointed out that the global expansion looks healthy with the global purchasing managers’ index for manufacturing reflecting an ongoing reflationary environment. The U.S. is also experiencing moderate real growth of 2.0% year-over-year. While inflation has somewhat cooled, deflation is not a major concern with the economy steadily improving. The rosier outlook has set the pace for normalization in the Federal Reserve’s monetary policy as many anticipate rising interest rates ahead.

Lebovitz also warned that stock returns will likely be lower going forward, given the extended bull market run and loftier valuations in equities.

Consequently, this suggests that alternative investments, like hedge fund strategies, can play a role in an investment portfolio to diversify away potential risk-off events. Looking at the past 15 years, Lebovitz pointed out that the average hedge fund only showed a minimal -1.1% return during down months when the S&P 500 averaged a -3.7% return. Additionally, the average hedge fund generated a +0.3% return in months when the Barclays Aggregate Bond Index showed a -0.7% return.

Yasmin Dahya, Head of Americas Beta Specialist for J.P. Morgan Asset Management, argued that hedge fund strategies provide many benefits for investors, including diverse investment strategies, attractive risk-adjusted return potential, downside mitigation and potentially reduced market sensitivity.

“Hedge funds participate in up markets, while mitigating loss in down markets,” Dahya said.

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