Savvy investors felt a strange chill in the air this past summer. As temperatures and equities valuations rose sharply on Wall Street, analysts at Goldman Sachs released a market outlook that was full of cold, hard historical facts.
Potential for lower returns
Analysts revealed that the 10-year annualized returns on the S&P 500 were in the single digits or negative 99 percent of the time when starting with valuations at current levels. They offered the chart below that showed the S&P’s cyclically adjusted price-to-earnings ratio, or CAPE, is now at its highest historical levels.
Clint Carlson's hedge fund, Carlson Capital's Double Black Diamond strategy, gained 1.04% net of fees in the month of September. Following this performance, the fund has returned 9.87% net of fees for the year to the end of the month. Q3 2021 hedge fund letters, conferences and more The Double Black Diamond strategy makes up Read More
Given this potential for lower returns and concerns that stocks are too expensive, Goldman urged a “fresh look at alternative strategies.” Specifically, analysts suggested that international small caps could be positioned to benefit from the global economic expansion.
Lower your expectations or risk?
It used to be that investors could rely on bonds when faced with the prospect of lower equity returns. But with today’s low yields, that approach appears to be as helpful as buying a bikini for a blizzard.
Given the current climate, we think investors have a choice to make. They can lower their expectations and simply accept that a season of lower returns may be upon us. After all, single-digit returns are the historic norm.
Or they can actively seek an all-weather investment like managed futures. Because it is uncorrelated to the stock market (and other alternatives), managed futures historically delivers two diversification benefits.
Managed futures helps to lower portfolio risk, keeping portfolios at a more comfortable temperature, no matter if the winds howl on Wall Street. It does this by taking a different kind of risk than stocks and bonds.
More than a hedge
At the same time, managed futures also has the potential to deliver positive returns, especially at the right allocation levels.
Few investors realize that when used properly, managed futures has outperformed stocks and bonds since the turn of the century. Since the year 2000, the asset class has performed positively in 13 out of 15 of the S&P 500’s worst-performing months.
Which brings us back to our choice. Are we going to heed the historical record and take a fresh look at alternatives that truly diversify? Or be left out in the cold when the market turns?
Article by Longboard Funds