One of the biggest challenge investors
who evaluate our strategies come across is the asset allocation
decision relative to their existing portfolios. The challenge is
really in two parts:
-
In what asset bucket do our
strategies belong. Hedge funds? Equities? Liquid Alternatives?
Smart Beta?, and
-
Are our strategies best used as
satellite or core allocations.
The challenge exists for two reasons.
First, we use hedge fund public disclosures to derive our strategies
so the first bucket investors instinctively look to place us is
“hedge funds”. Second, our products are not structured as hedge
funds but in more liquid, transparent, lower cost form such as
separate accounts and exchange traded funds so investors look to
compare us against other “liquid alternative” strategies. Both
impulses, for the most part, are incorrect – how investors should
think about our strategies is actually very simple:
-
Our long only strategies belong in
the equity bucket.
-
Our long/short strategies belong
in the “hedged equity” bucket.
-
Our Hedge Fund ETF Ideas strategy
belongs in the tactical asset allocation bucket.
Our strategies seek to be the (or
a) “performance engine” inside the investor's portfolio.
For investors who don't currently allocate to hedge funds (most),
then we want to replace/augment your existing long only equity
allocation – passive and/or active.
For investors who do currently allocate
to hedge funds (institutions and other qualified investors), we want
to ALSO replace/augment your existing equity market
directional allocation (not your absolute return or global macro or
any other kind of hedge fund strategy that is not equity and market
directional).
As for the question of core vs
satellite – the answer is either. AlphaClone Select can replace an
investor's entire US large cap allocation as a core offering or
augment the investor's existing allocation as a satellite. Same for
AlphaClone Momentum and US small cap and so one as you look at each
of our strategies relative to their asset category.
To illustrate the above let's compare the backtested performance of a
portfolio of index funds against portfolios where AlphaClone
strategies replace/augment different segments of the allocation mix.
See tables below for the makeup of each portfolio.
Index Portfolio
Allocation % |
Fund/Strategy | Ticker
15% | SPDR S&P 500 ETF Trust | SPY
15% | iShares Russell 2000 Index Fund |
IWM
15% | iShares MSCI EAFA Index Fund |
EFA
15% | iShares MSCI Emerging Markets
Index Fund | EEM
40% | iShares Core Total US Bond Market
ETF
AlphaClone – Replace All Equities
Allocation % |
Fund/Strategy | Ticker
10% | AlphaClone Select (large cap)
10% | AlphaClone Momentum (small cap)
10% | AlphaClone Activist Masters
(activist)
15% | AlphaClone International (ADRs)
15% | AlphaClone ETF Ideas (various)
40% | iShares Core Total US Bond Market
ETF | AGG
AlphaClone – Replace US Equities
Allocation % |
Fund/Strategy | Ticker
10% | AlphaClone Select (large cap)
10% | AlphaClone Momentum (small cap)
10% | AlphaClone Activist Masters
(activist)
15% | iShares MSCI EAFA Index Fund |
EFA
15% | iShares MSCI Emerging Markets
Index Fund | EEM
40% | iShares Core Total US Bond Market
ETF
AlphaClone – Satellite to US
Equities
Allocation % |
Fund/Strategy | Ticker
10% | AlphaClone Activist Masters
(activist)
10% | SPDR S&P 500 ETF Trust | SPY
10% | iShares Russell 2000 Index Fund |
IWM
15% | iShares MSCI EAFA Index Fund |
EFA
15% | iShares MSCI Emerging Markets
Index Fund | EEM
40% | iShares Core Total US Bond Market
ETF
The results show improvement in the
risk adjusted returns across the board when AlphaClone strategies
were added. Improvement is most pronounced when our strategies
replaced all equities in the portfolio over a five year period. You
can see why this is by looking at the annual returns for each
portoflio (see below). During 2008, our AlphaClone Hedge Fund ETF
Ideas and our dynamically hedged Select, Momentum and International
strategies did a good job of mitigating drawdowns in that year. In
addition, during the market run up in 2009 and 2010 our strategies
also did well demonstrating good upside capture.
|
5 Year Performance (4/30/2008 to 4/30/2013)
|
|
Investor
|
Annualized Return
|
Annualized Volatility
|
Sharpe (1%)
|
|
Index Portfolio
|
3.12%
|
11.82%
|
0.18
|
|
AC – Replace All
|
8.57%
|
9.19%
|
0.82
|
|
AC – Replace US
|
6.35%
|
10.38%
|
0.52
|
|
AC – Satellite
|
3.91%
|
11.90%
|
0.24
|
|
3 Year Performance (4/30/2010 to 4/30/2013)
|
|
Investor
|
Annualized Return
|
Annualized Volatility
|
Sharpe (1%)
|
|
Index Portfolio
|
5.54%
|
9.23%
|
0.49
|
|
AC – Replace All
|
5.81%
|
8.78%
|
0.55
|
|
AC – Replace US
|
6.62%
|
9.03%
|
0.62
|
|
AC – Satellite
|
6.43%
|
9.40%
|
0.58
|
|
Annual Performance (2008 to 2013YTD)
|
|
Year
|
Index
|
AC-All
|
AC-US
|
AC-Sat
|
|
2008
|
-22.22%
|
-4.81%
|
-16.25%
|
-22.09%
|
|
2009
|
19.84%
|
24.75%
|
25.28%
|
20.77%
|
|
2010
|
12.31%
|
14.77%
|
13.51%
|
13.21%
|
|
2011
|
-4.36%
|
-3.61%
|
-4.72%
|
-3.34%
|
|
2012
|
8.90%
|
8.59%
|
11.52%
|
10.19%
|
|
2013YTD
|
4.87%
|
7.18%
|
7.91%
|
5.13%
|
AlphaClone strategies belong in the
“equity” or “hedged equity” buckets. Their objective inside
a portfolio is to provide the potential for alpha generation during
bull markets while mitigating market risk during protracted bear
markets. It's that simple.