QuotedData: Can hedge and multi-asset funds navigate choppy markets?

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As their recent movements show, global markets are currently characterised by uncertainty. There are a range of competing opinions about where the global economy is heading. The scenarios range from stagflation to recession as well as the prospect of hyperinflation but there seems to be little in the way of clear consensus other than that further bouts of market volatility are likely.

Greater volatility is likely to create opportunities for some investors but it will not be to everybody’s taste and some are now actively looking for strategies that aim to provide less volatile, more absolute return-focused solutions. For those investors in search of a less bumpy ride, two areas that are sometimes overlooked are funds that offer exposure to hedge funds or those that have multi-asset strategies.

Hedging risk

The hedge fund sector offers a range of strategies designed to provide returns in a variety of market conditions. However, for the average investor, these funds can be difficult to access; large minimum investments and the specialist due diligence required put them beyond the reach of many, particularly if you wish to get diversification from getting exposure to a range of hedge fund strategies. All is not lost though. A listed fund of hedge funds can give investors exposure to a range of strategies for the price of a single share.

An example of such a fund is Altin. It grew its net asset value quite steadily over 2015. Its exposure to protection strategies was increased earlier in the year and this decision appears to have served it well. However, its advisers say that recent corrections have not been severe enough for its tail protection strategies to really kick in but they believe these could provide significant benefits in the event of a sharper market fall.

Investment trusts with low 1-year standard deviation

QuotedData chart

Multi-asset options

Multi-asset funds spread risk by having a wider range of, less correlated, return sources. An example is Seneca Global Income & Growth. This trust aims to outperform cash plus 3 per cent over the longer term, with lower volatility than traditional equity markets. Seneca Investment Managers, which describes itself as a multi-asset value investor, says yield is the principal determinant of value when making asset allocation decisions. Its approach appears to be benefitting the trust – it has been outperforming its peers and has traded at a premium in recent months. However, it is worth remembering these approaches cannot provide complete immunity to market sell-offs and the performance of Ruffer during the second half of last year provides an illustration.

Ruffer has a multi-asset approach and aims to achieve a positive total annual return, after all costs, of at least twice the Bank of England base rate with a strong focus on capital preservation. Ruffer had a strong start to 2015 but managers say the second half proved to be difficult in meeting its capital preservation objective and its NAV total return was -4.6 per cent. The managers are expecting a significant increase in inflation and had actually been focusing on reducing risk during the second half of 2015. They say they should have reduced equity exposure further and taken more profits during the market sell-off in August and September. However, while the options have detracted in this instance they would expect them to make a significant positive contribution during a more extreme market fall.

Matthew Read is a senior analyst at QuotedData