Alternatitve equity strategies are outpacing traditional strategies in volatile financial markets, according to a Standard & Poor’s (S&P)report covering 38 funds in the sector.
S&P Fund Services alternative strategies sector head Michael Armitage said absolute return, alternative income and market-neutral strategies continued to outperform relative long-only strategies in uncertain and volatile markets.
“With global equity markets experiencing significant effects of global macro events in recent periods and the classic ‘buy and hold’ equity proposition failing many investors over extended periods, alternative equity strategies continue to present a strong case for inclusion in a well-diversified portfolio,” Armitage said.
As a result, alternative equity strategies had proved they had a place in a diversified portfolio, he said.
“Most of the alternative equity peer groups have shown risk-adjusted returns that are superior to their long-only indices. Given continued uncertainty and increased levels of volatility, investors will benefit from managers that have more unconstrained strategies – especially those that also concentrate on capital preservation.
“Additionally, we continue to witness stronger institutional quality offerings, which increased the overall level of competition in our peer review.”
The report covers the release of 38 alternative equity capabilities in equity beta variable, alternative income, market-neutral and market exposure strategies as part of S&P’s latest review of the sector.
Among the report’s key findings, S&P said investors were cushioned on the downside thanks to flexible mandates of the variable beta peer group managers that were continuing to show their strengths since its last review.
It also said the equity income sub-peer group impressed as a product that was underappreciated as a potential core allocation for income-focused investors.
“In addition, market-neutral strategies have impressed and offer further diversification for investors,” Armitage said.
The three market-neutral trading strategies proved their worth as alternatives – showing alpha and avoiding significant drawdowns in negative equity environments – demonstrating effectively the portfolio diversification potential of the format.
However, Armitage sounded a note of caution, saying: “In what is a continuing point of focus for us, we note that managers are mostly showing good awareness of the credit risks inherent in shorting, fund custody and prime brokerage arrangements. However, these continue to be addressed only slowly, and not by all.”
