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These Terms Are Synonymous with Expectations for An These terms are synonymous with expectations A global macro strategy primarily bases its holdings for an improving market, industry, or security. on overall economic and political views of various countries (i.e., macroeconomic principles). An investor who expects a specific industry to increase in value would be “bullish” on that Holdings may include long and short positions in industry, and would likely “buy” or “go long” that various equity, fixed income, currency, and futures industry. markets. The strategy is typically based on forecasts and analyses about interest rate trends, the global flow of funds, political changes, government policies and These terms are synonymous with expectations for relations, and other global factors. a declining market, industry, or security. An investor who expects a specific industry to decrease in value would be “bearish” on that industry, and would likely “sell” or “go short” that Global macro maintains a long history of delivering industry. attractive returns and providing diversification benefits, including low correlation (but typically not negative) to traditional asset classes. The strategy also typically operates globally, which can increases geographic diversification to a client portfolio. Global macro requires either a talented manager (like long / short equity) or a very sophisticated process. Because there are so many moving parts, the “good ideas” or “winning trades” are often watered down or completely voided by the bad trades. In a managed futures account, Commodity Trading Advisors go long or short futures contracts for various assets dependent on market trends. For example, if soybeans have been trending lower for an extended period of time, a Commodity Trading Advisors will “go short” this contract. Managed futures funds typically maintain exposure to equity, fixed income, commodity, and currency markets and trade on intermediate to long-term trends (1 to 12 months). Significant nuances between managers (including strategy, fees, investment style, transparency, leverage, and process), may largely impact performance and the investor. Introducing managed futures into a portfolio historically reduces risk due to the negative correlation between asset groups. As an example, the BTOP50 Index (which is a basket of the largest Dating back to the late 1940s, long / short equity is CTAs) was up 14.5% during the Great Recession the oldest and most prevalent alternative strategy. and up 39.0% when the tech bubble burst. During This strategy takes long (or bullish) positions in the same periods, the S&P 500 Index was down stocks expected to appreciate in value and short (or 50.9% and 44.7%, respectively. bearish) positions in stocks expected to decline. Managed futures typically also maintain positive The total return combines the return from market convexity, meaning that negative (or opposite) exposure (beta) plus any value added from stock- correlation to typical investments in turbulent picking or market-timing (alpha). markets turns to positive correlation in bull markets. Depending on the underlying manager’s strategy, Managed futures require volatility to be successful. long / short equity funds may have a low-to-negative In the current environment, global central banks correlation to the S&P 500 Index, providing a strong have sizably reduced volatility, thus reducing the hedge and diversification component to their ability of CTAs to successfully follow positive and strategy. negative trends. Some CTAs have created their own volatility to help performance of their strategy; this style drift is commonly called “volatility targeting.” Long / short equity requires a skilled manager able Volatility targeting can perform well in low volatile to identify opportunities. environments, but the increased leverage and The long and short positions could cancel each volatility often brings its own set of risks, particularly other out or worse, both go in the wrong direction related to outlier events. and the strategy doubles down on losses. Event-driven strategies take advantage of transaction announcements and other one-time events. One popular example is merger arbitrage during an acquisition announcement. Merger arbitrage involves buying the stock of the target company and hedging the purchase by selling short the stock of the acquiring company. Additional strategies include buying distressed assets or purchasing a company to implement change (i.e., activist investing). Like previously mentioned strategies, event-driven strategies typically carry low correlation to equity markets and, sometimes, even economic conditions. While the odds are often small, failed mergers can have a significant negative effect on performance (as evidenced in the Allergan and Pfizer merger). Additionally, the ability to change corporate structure or culture can be very difficult and thus limit upside potential. The material contained herein has been prepared from sources we believe to be reliable, but is provided without any representation as to accuracy or completeness. This material does not purport to be a complete analysis of the securities, companies or industries involved. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. All opinions and estimates included with this material are our own unless otherwise stated and are subject to change without notice. All investments can fluctuate in price, value and/or income. Past performance is not necessarily a guide to future performance. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Detalus Advisors, LLC and/or its affiliates, managers and employees may have or have had an interest or position in the securities described herein. Mutual funds and ETFs deduct their own operating expenses within their daily Net Asset Value (NAV). Detalus, its reps, or any affiliates do not receive any of these fund expenses as compensation. Additional information will be made available upon request. .
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