Mercer Investment Consulting Article: “Solutions to help mitigate risk and volatility”

I was recently looking to write something about how to capitalize on long volatility strategies given the high amount of systemic risk and came across an excellent article written by Mercer Investment Consulting.

The article discusses how and why pensions should be looking at certain strategies including managed futures to protect against increasing volatility. The author of the article discusses how managed futures perform strongly in times of crisis. He highlights how managed futures provide insurance during tail risk events, how they trade and the liquidity that they offer.

The point which we disagree with the author is that managed futures are an expensive insurance policy. From our of point view, not allocating to managed futures would be more expensive given, for example,  the losses suffered by traditional portfolios in 2008. Moreover, over the long run our analysis and much academic research has shown that a 20% allocation to Managed Futures can increase total portfolio performance by 50%, lower volatility by half, and reduce drawdowns significantly. Thus, the benefit of including Managed Futures within an overall portfolio more than offsets the costs.

Also, new products have been brought to market that offer transparent, cost effective and liquid solutions through third generation enhanced indices. There are a number of mutual funds and ETFs that track these new indices thereby providing cost effective insurance for both retail and institutional investors. A number of the third generation Auspice enhanced indices were developed after speaking to a number of investors (from pensions to retail) on their diversification needs and constraints.

The Claymore Broad Commodity ETF is the first managed futures ETF in Canada and offers investors a long flat basket of commodities. The up-coming Horizon Auspice Managed Futures Index offers a similar long short strategy based on the same basket of commodities plus some currencies and fixed income futures.

In summary, there are a broad number of choices available to investors that can either meet their needs for performance through active alpha generating strategies or for cost effectiveness through enhanced beta solutions.

Leave a Reply