Instead, he notes currency strategies have performed well, including positions that were long the US dollar and short the Canadian dollar. “There is a strong, negative correlation between this strategy and everything else. So something like this will act as a diversifier when the equity and credit positions behave in a certain way.”
Mr Flood says that alternatives have historically been under researched. Most fund managers run either equities or bonds, while traditional multi-asset investors have tended to shy away from the sector as it is not in the benchmarks.
He points to the fact alternatives in a multi-asset portfolio also need to be differentiated in terms of the sustainability of the yield, with a focus on businesses that can grow through a recessionary period and come out stronger.
Alternative strategies can include convertible bonds, catastrophe bonds, hedge funds and even aviation finance – buying an aircraft and effectively leasing it out. But while these are all diversifying assets, the key thing investors should ask is whether they are getting paid for the risk.
“These asset classes benefit at different points in the cycle,” Mr Flood says. “For example, I don’t believe you’re getting paid for the risk you’re taking with catastrophe bonds, but those types of securities are going to be uncorrelated with risk assets so they do provide diversification. If you’re not getting paid for the risks you’re taking, you shouldn’t be holding [those assets] just for the sake of diversification.”
Mr Ford agrees: “Clearly [you] need good ideas, but it is trying to find a combination of ideas that will generate returns on different time frames. It’s not just the number of strategies, it’s the negative correlation and having strategies that behave in different ways. So you have a portfolio that is robust and can perform well whatever happens.”
Nyree Stewart is features editor at Investment Adviser
