Duke Ellington famously sang that “things ain’t what they used to be.” This tune came immediately to mind when thinking about themes for 2016. With stocks at record highs, interest rates at record lows, and uncertainty around U.S. Federal Reserve (Fed) policy and the economy, it seems safe to say that financial market performance in 2016 is highly unlikely to be as good as it has been since 2009. If it’s correct that the long-running bull market is likely to give way to more modest returns, then it is fair to ask if investors have the right strategy for the coming market environment. Specifically, we argue that investors should seek to improve diversification and risk-adjusted performance by adding alternative sources of return in the form of market-neutral strategies.1
Read Wittman’s full Q1 2016 CIO Insight:
Alternative Strategies for More Volatile Markets
1 Market-neutral strategies invest approximately equal dollar amounts in long positions (expected to increase in value) and short positions (expected to decrease). Short position refers to the sale of an asset borrowed, not owned, by the seller in anticipation of a price decline. If the seller can buy the asset later at a lower price, a profit results. If the price rises, the borrower/ seller suffers a loss. A long position is the typical ownership of an investment; it gives the owner the right to transfer ownership, any income generated by the asset, and any profits or losses.
Diversification does not assure a profit nor does it protect against loss of principal.
Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies, than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance risk.
The opinions expressed are those of Scott Wittman, CFA, CAIA, and are no guarantee of the future performance of any American Century Investments portfolio.
For educational use only. This information is not intended to serve as investment advice.