Alternatives Forum 2023

Being patient

Crocodiles are known to be aggressive, ferocious and opportunistic, constantly on the lookout for their next meal.

However, what’s less known is their uncanny ability to be extremely patient.

Beyond just waiting motionless in water for hours or days, research indicate that these reptiles can live without eating for more than three years, given their slow metabolism. This allows them to go inactive for long period of time – at the risk of being misunderstood as passive predators.

Investors deploying alternative investments, which can be labelled as a spectrum of hedge funds, volatility and trading strategies, private market instruments etc that are uncorrelated to stocks and bonds, are often expected to be patient too.

Until recently, buoyed by the ‘Fed put’ and the bond bull run, investors had little incentive to diversify away from stocks and bonds. In fact, any deviation from a stock/bond exposure has caused a performance drag. This has called into question the role of alternatives in the portfolio.

However, market cycles do change, sometimes abruptly.

With inflation risks triggered by the COVID pandemic and the Russia/Ukraine conflict, this new investment regime may spell the death of the 60/40 stock/bond portfolio. Long suffering investors with significant exposures to alternatives are more likely to benefit from the recent stock/bond downturn.

Deploying alternative investments in the long-term portfolio has never been more important.

Adaptable mindset

The crocodile is a master of adaptability. It uses a variety of techniques to catch its prey, depending on the situation.

Notwithstanding its patient temperament, it is quick to ambush its prey with lightning speed and precision when the perfect opportunity presents itself.

Depending on the nature and size of the prey, it may choose to inflict the simple bite, or the ultimate death roll!

Since Australian sociologist Alfred Winslow Jones created the first hedge fund structure in the 1900’s, the hedge fund industry has expanded to include a plethora of techniques and structures. These may include market neutral, global macro, relative value, merger arbitrage, trend following, alternative risk premia and a host of esoteric strategies across the liquidity spectrum.

Through various market cycles, which are becoming shorter and more volatile, the performance dispersion from these idiosyncratic strategies is often baffling and unpredictable in the short term.

The need to be nimble, matching underlying characteristics of the different sub-strategies to the objectives of the portfolio, remain critical. Implementation matters.

Overcoming weaknesses

Despite being an apex predator, the crocodile is not without any weakness.

While it possesses the strongest bite of any animal, it has relatively weak jaw opening muscles, which can be held shut with your bare hands. And while it is extremely fast in water, it is a myth that it is equally versatile on land.

Likewise, the discerning investor will do well to understand the underlying fundamentals of different alternative strategies – whether they be alpha seeking or risk mitigating as well as the corresponding correlation characteristics.

Therein lies the importance of portfolio construction.

We look forward to a robust discussion on the efficient implementation of alternatives at the 7th annual [i3] Alternatives Forum 2023.

(PS: We acknowledge the assistance of ChatGPT in the production of this synopsis)

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