Alternative Investments Managers Welcome Volatility’s Return

By Cleo Chang - November 14, 2018

Volatility has made a comeback in the equity markets, and that’s actually a good thing for active managers. It gives us an opportunity to make buy, sell and hold decisions based on true fundamentals. And for managers of alternative investments (alts), the return of volatility also gives us the chance to benefit from long positions, but also against companies and sectors that we look at skeptically. In fact, we’re already seeing alts managers posting more competitive performance compared to the traditional long-only strategies on a risk-adjusted basis.

Based on discussions we’re having with investors, I think we’re starting to see a shift in mind set: many are looking for more hedges right now, which is leading to asset flows into long-short strategies. In the course of this current 10-year bull market, we haven’t heard “hedge” getting thrown around much as an investing tactic.

In my latest quarterly video, I dive into all of these topics, as well as the hotly debated yield curve—and what an inversion might (or might not) tell us about the economy and the potential for a recession.

 

Transcript

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      Fund(s) shown may take short positions. A short position arises when the fund sells stock that it does not own but was borrowed in anticipation that the market price of the stock will decline. If the market price declines, the fund can replace the borrowed stock at a lower price and capture the value represented by the difference between the higher sale price and the lower replacement price. Conversely, if the price of the stock goes up after the fund borrows the stock, the fund will lose money because it will have to pay more to replace the borrowed stock than it received when it sold the stock short. Any loss will be increased by the amount of compensation, interest or dividends, and transaction costs the fund must pay to the lender of the borrowed security. In addition, because the fund's loss on a short sale stems from increases in the value of the stock sold short, the extent of such loss, like the price of the stock sold short, is theoretically unlimited. By contrast, a fund's loss on a long position arises from decreases in the value of the stock and therefore is limited by the fact that a stock's value cannot drop below zero. In addition, the fund may not be able to close out a short position at a particular time or price advantageous to the fund and there is some risk the lender of the stock sold short will terminate the loan at an inopportune time.

      A long position is the opposite of a short position. A long position is the buying of a security such as a stock with the expectation that it rise in value.

      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 for risk.

      Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

      The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.