Strategies to Mitigate Risk and Volatility

Mitigate Risk and Volatility

With stock markets strongly rebounding from the unprecedented sell-off, it may seem counterintuitive to focus on the potential for a declining stock market. Of course, stocks remain a key asset class for investors looking to meet their return objectives, yet, as recent history has shown, there can be little warning of the next downturn. As a result of fears over COVID-19, we saw volatility spike to levels not seen since the global financial crisis and volatility is expected to remain at elevated levels as measured by the CBOE Volatility Index (VIX).

CBOE Volatility Index (VIX)

Source: Bloomberg, as of September 25, 2020

History suggests that sizable drawdowns occur within equity markets at regular intervals, however timing those drawdowns has proved fleeting. Allocating strategically to proven equity market hedges can insulate your portfolio from unexpected market events and reducing drawdowns can help to alleviate the consequences of negative compounding on wealth creation.

S&P 500 TR Max Drawdown

Source: Bloomberg and AGF Investments, LLC. Returns are for the S&P 500 TR Index in USD from January 1, 1990 to June 30, 2020 and are for illustrative purposes only. One cannot invest directly in an index.

 

Alternative Approaches in Portfolio Construction

The global pandemic and resulting equity market volatility, lofty valuations and historically low interest rates pose unique challenge to traditional “balanced” portfolios. Return expectations for balanced portfolios are diminished with “safe” traditional bonds expected to have low returns and less diversification benefits during equity drawdowns. This has led many investors to rethink traditional approaches and turn to alternative asset classes and strategies.

Alternatives can be fundamental building blocks for a well-constructed portfolio and crucial ingredients in a disciplined approach – contributing to lower volatility and opportunities for better long-term risk-adjusted returns.

diversification
Diversification 

Solutions that utilize a long/short construction have historically shown lower correlations to traditional equity and fixed income investments with the potential to provide greater diversification and reduced volatility over the long-term.

protection
Downside Protection

An allocation to a market neutral strategy has the potential to reduce overall portfolio risk while smoothing out the effects of volatility.

returns
Unique Sources of Returns

Liquid alternatives seek to deliver returns outside of the traditional “buy and hold” approach with unique structures. This can complement existing holdings and provide tools for very strategic portfolio positioning.

Portfolio Allocation Tool

Including an allocation to an anti-beta strategy as a strategic hedge within a traditional balanced portfolio could smooth out the return profile, lower volatility and reduce the impact of drawdowns.

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