"Alternatives"...

Alternatives, along with ESG, have become one of the buzzwords of the investment industry over the last couple of years.

AuM managed in “alternative” strategies such as private equity and private debt has been growing by double-digit numbers for several years in a row now. This is all very understandable – up until very recently, investors were facing a challenging low yield environment that was pushing them to “yieldy-er” asset classes. The chance to benefit from the so called illiquidity premium while also adding diversification to one’s overall portfolios was the reason why private equity and private debt strategies became so popular with investors. Whether or not this promise will turn out to be true in the current inflationary environment is yet to be seen, but this is a topic for a different discussion.

Interestingly enough, many professional investors assign Trend Following to their “Alternatives” portfolio allocation. As such, Trend Following sits alongside strategies like private debt, private equity, long-short relative value, and others. This is peculiar not least because Trend Following is neither illiquid nor it benefits from the same market phenomena as other Alternative strategies. All this is to say that “Alternatives” as a term is very broad and tells us hardly anything about the nature of the underlying investment strategies.
And because this term is so loosely defined, you shouldn’t be surprised to find out that it’s been used in the Trend Following world too!

Within Trend Following, when we speak about Alternatives, what we typically mean is non-traditional markets that some managers choose to add to their investment universe. Since the pure, orthodox way of Trend Following is limited to trading Futures markets only, anything beyond those is usually deemed Alternatives/non-traditional. Examples of such markets include all the various OTC markets, ETFs, single stocks, and others. More importantly, long-term listeners of our podcast series know that several of our co-hosts have taken the step of integrating such markets into their trading systems.

The question remains though – is it worth the effort? Do the extra returns and diversification of adding these markets outweigh the operational complexity and additional risks (e.g., counterparty risk) that come with adding such markets?

In theory, the answer is a clear Yes. However, as we all know, there is usually a difference between theory and practice. Thankfully, we had Rob Carver as a guest in this week’s episode of the Systematic Investor podcast series, and Rob elaborated at length on this topic.
Curious to find out what Rob had to say? Feel free to tune into this week’s episode of our Systematic Investor podcast series and find out yourself. As usual, we promise your time will be well spent.

Curious to find out more about this? Feel free to tune into this week’s episode of our Systematic Investor podcast series and find out yourself. As usual, we promise your time will be well spent.