|2 Oct 2014|
QLAB UPDATE SEPTEMBER 2014
The multi-asset absolute return strategies had a negative month driven by a sudden drop in all commodities, plus a sharp increase in USD coupled with a decline in most equities and 5YR US Treasury bonds providing little place to hide in the investment universe. Healthcare and Industrial stocks plus the 2YR US Treasury were however positive and provided some diversification, and performance over 1 year and longer horizons remains within expected ranges.
It is unusual for seemingly diverse assets to all sell off together, fairly strongly and in just one month. However, the correction serves as a reminder that sudden market shocks can happen at any time, and the resulting correlation increase does reduce diversification in the short term. So although over just one month this appears like a perfect storm, over longer term horizons multi-asset portfolios are more robust than single asset portfolios.
The multi-asset absolute return models have reacted, and all commodity positions will now be sold, together with most FX positions and Energy stocks which also declined rather heavily during the month. The resulting allocation will be fairly balanced between US equity sectors, 2YR and 5YR US Treasury bonds plus a small position remaining in GBP. In the dynamic version, exposure is reduced from 300% to 280% as although equity volatility has increased somewhat, the absolute level is still not abnormally high by historical standards
In the commodity long/short absolute return strategy where shorting is allowed, with the positioning currently 50% net short, the strategy consequently had a strong month benefitting from the commodity decline. The strategy remains net short for the coming month.
How can one absolute strategy be long commodities and another short? Actually the models are very similar, it is linked to the different investment goals and exposure constraints. The muilti-asset absolute return strategies are designed as long-only to fit more traditional portfolio allocations and, in order to benefit from longer term uptrends the model is set to pick up on slower moving trends. The commodity long/short strategy aims to be more reactive going long and short, and is thus configured to pick up on shorter and medium terrm trends. The commodity long/short model went net short in August and the multi-asset went out of commodities at the end of September. A timing difference of two months is not unusual due to the different sensitivities, and generally over the long term they are consistenly positioned.
We offer solutions that at the product level, suit different investment needs. At the investor portfolio level the solutions can then be combined, with other products of course, to create highly diversified portfolios which fit the investor's particular goals and risk tolerances.