Are we surprised by this sell-off? Nope this was our exact call.

I love how all of a sudden everyone is an expert on risk parity, CTA, and the short volatility trade. Unreal!

At Astoria, we are quantitative with our investment approach. I spent the first 8 years of my career in Equity Derivatives Research so I personally like to look at probabilities and the distributions of various outcomes.

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Everything that has transpired so far in 2018, we warned investors in our year ahead outlook (produced Dec 6, 2017).  If you don’t believe me, I welcome you to look at our website.

The bottom line is this.  A 10% pullback in equities shouldn’t surprise anyone if you look at the distributions of stocks over the past 100 years.

Timing the market is a low probability event of having repeatable success.   If you have any guts, you should be buying risk assets (we prefer ones with a margin of safety) and hedging those risk assets to focus on attractive risk adjusted returns.

Everyone looks like a hero when the market goes to the moon and VIX is at 10.  Portfolio managers will earn their salaries this year if they do well – and they should. We are late cycle.

We continue to advocate the following

1) Invest in risk assets where there is a margin of safety.

2) Mix several factors in your portfolio. Research shows you are able to get higher risk adjusted returns when you blend several factors (we love beta, value, momentum, carry).

3) Incorporate alternatives. The stock / bond correlation is broken.  Common sense will tell you when you put $2 trillion dollars into bonds that all the historical attributes are long gone. With the exception of variable preferreds, floating rates, and short duration high yield munis, everything else is a poor risk reward in our view.

4) Include commodities. We made a big call in commodities in our Dec 6, 2017 outlook report.  It’s working so far.  You can earn positive carry right now if you pick the right fund.

5) Own gold and inflation sensitive assets.  It’s common sense. We are late cycle and inflation is rising.

6) Avoid long duration assets like the plague (or unless you are one of those that just like playing with fire).

7) Make sure you have hedges in your portfolio that carry well. This is the most important (and differentiating) component of Astoria’s investment process.

Best, John Davi
Founder & CIO of Astoria

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