Summer IPA Anyone?

Inflection point alpha

Jim Neumann, CIO, Sussex Partners

Pundits will always differ on the identification of market stages and especially on when a reversal of a sustained bull run for an individual asset class or multiple asset classes will occur. Despite this timing question, many investors are looking carefully at current market levels against a backdrop of the unwinding of global quantitative easing and increasing geo-political tensions. The result of this examination has been that investors are beginning to seek to create a basket of protective strategies with the goal of producing positive returns which are necessarily uncorrelated from major asset classes as markets begin to move sideways and the threat of a sustained downward correction increases. As the summer slows down the markets (hopefully) and vacations dominate, it may be a nice respite to consider making some protective portfolio shifts/additions.

Inflection point alpha (“IPA”) is meant to be a modified version of the concept of full blown crisis alpha, as first introduced by Dr. Kathryn M. Kaminski, now Chief Research Strategist at AlphaSimplex, the firm founded by the esteemed Andrew Lo of MIT. This modification does not contradict the idea that when multiple assets are in “crisis” mode certain strategies (trend following was highlighted) perform well. Putting forth IPA is, however, an attempt to proactively deal with where the markets are currently, their probable path, and what that means for institutional investors trying to successfully navigate the period. Crisis alpha looks for periods in which two or more assets are in crisis, each with a crisis barometer. IPA does not rely upon assets being in a defined crisis but addresses the fact that that there are periods of inflection for global economies and their underlying assets. This approach will focus on the use of alternative investments in combination with existing traditional or alternative portfolios.

Alternative investments, as the name suggests, are those which provide some seemingly different means of generating returns relative to traditional fixed income, equity and cash investments. Included under the current alternative investment umbrella are private equity, hedge funds, managed futures, real estate, and derivatives. The aim is to provide some intelligent investing diversification versus the old standard 60% equities/40% bonds portfolio. Here, the focus will be upon hedge funds, managed futures, and commodities (with derivatives being a way to achieve exposure and imbedded in certain strategies).

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