How have alternatives stood up to the COVID-19 acid test?

Evidence indicates asset classes have lived up to promise of risk mitigation relative to traditional long-only portfolio

How have alternatives stood up to the COVID-19 acid test?

The recent market riptide due to the COVID-19 pandemic has punished broad stock indexes and traditional bonds. For alternative investments, which have long been billed as a valuable defensive portfolio piece, it’s been a chance to prove their worth — and prove it they have.

In a new blog post, Bill DeRoche, Chief Investment Officer and Head of AGFiQ Alternative Strategies at AGF Investments, acknowledged that not all segments have performed equally well. But the evidence suggests several assets and strategies have been able to provide additional downside protection.

“This is perhaps most obvious when assessing the performance of gold,” DeRoche said, noting that the metal gained 4% in the first quarter and fell just 3.6% as equity indices like the S&P 500 and the S&P/TSX lost roughly 35% within a month.

Real assets typically placed in the alternatives bucket, such as infrastructure and real estate, have shown more mixed performance during the crisis. Factors such as whether they’re private or publicly listed and whether they have ties to the distressed energy sector, he said, have contributed to the divergences in results.

“The performance of some of the most common hedge fund strategies has been similarly wide-ranging,” he said. Data from Preqin has shown dramatically diverse performance, with some segments eking out small gains as others suffer double-digit losses. But hedge funds overall have outperformed the broader equity market, as reflected by the -10.38% Q1 2020 loss in the Preqin All-Strategies Hedge Fund Index that came as the S&P 500 declined by 20%.

Liquid alternatives have been similarly promising overall, with most alternative funds available in the U.S. and other markets globally have done better than broader equity markets. Within that universe, only a small fraction — including AGF’s anti-beta strategy — registered positive gains, according to data from Morningstar.

“Our anti-beta alt … uses a dollar-neutral structure to provide long exposure to low-beta U.S. stocks and short exposure to high-beta U.S. names,” DeRoche explained. “While there are market circumstances under which the strategy may provide positive returns when broader equity markets are also rising, it is specifically designed as a hedge that will gain when equities fall, just as it has of late.”

While alternative investments as a whole have been able to help investors who own them reduce their overall portfolio drawdown during the recent equity downturn, he qualified that some strategies may perform differently due to their correlation profiles, their investment objectives, their management teams’ expertise, and unique challenges presented by prevailing market conditions.


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