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.
However, the benefits may not always help investors due to the compounding effects of fees, Dahya warned. A hedge fund may include a normal management fee of 1% to 2% on top of a performance fees of as much as 20% of annual gains.
“There are many talented hedge fund managers tha tmore than justify their fees. However, some of the favorite hedge fund (and active mutual fund) strategies are now available within ETFs,” John Lunt, President of Lunt Capital Management, said.
Alternatively, Dahya argued that investors can access the diversification benefits of hedge fund strategies through a cheap and efficient investment vehicle like the actively managed JPMorgan Diversified Alternatives ETF (NYSEArca: JPHF), which is head up by Yazann Romahi, Managing Director and CIO of Quantitative Beta Strategies for J.P. Morgan.
JPHF was J.P. Morgan’s first actively managed ETF to hit the market, combining various hedge fund-esque, alternative investment strategies in an easy-to-use ETF wrapper. Specifically, JPHF includes equity long/short, event driven and global macro based strategies.
“JPHF has generated returns in excess of the cash benchmark and outperformed a global hedge fund proxy,” Dahya said.
ETF investors interested in an alternative investment position may consider a 10% to 20% of a portfolio allocation to liquid alt strategies, Dayha added. For example, JPHF may act as a core diversified alternative investment.
Financial advisors who are interested in learning more about alternative investments can watch the webcast here on demand.