Joe Tigay Beyond the 60/40: A Market Maker’s Guide to Superior Risk-Adjusted Returns
In my years as a VIX market maker and financial advisor, I’ve witnessed firsthand the limitations of traditional investment strategies. The once-revered 60/40 portfolio, while offering a degree of balance, often falls short in today’s volatile markets. The allure of a strategy that promises both growth and protection has captivated investors for years. JPMorgan’s Hedged Equity fund has emerged as a shining star in this landscape, attracting substantial inflows as investors seek refuge from market volatility. However, a closer examination reveals that this seemingly sophisticated investment strategy may be little more than a repackaged version of the classic 60/40 portfolio. While the promise of reduced risk and enhanced returns is tempting, investors must carefully scrutinize the underlying mechanics of such funds before committing their capital. This underscores the critical importance of including a diverse range of alternative investments in a well-rounded portfolio.
Let’s dissect the image above. The orange line represents the JPM Hedged Equity strategy, while the white line is a mix of 60% S&P 500 Total return and 40% SHV ETF, comprised of short term US treasuries.
Key Takeaways:
The allure of hedged equity funds has grown exponentially in recent years, with JPMorgan’s Hedged Equity being a prime example. While these funds promise to mitigate risk, their performance often falls short. Many simply mimic a traditional 60/40 portfolio, substituting bonds with short-term treasuries. This tactic can dampen volatility but fails to deliver the true diversification benefits investors seek. As the popularity of these funds surges, diminishing returns become increasingly evident, highlighting the need for more innovative investment strategies.
Beyond traditional hedged equity funds, a universe of alternative options exists. Funds like Milburn Catalyst (MBXIX) offer a compelling approach. By diversifying across global assets and employing a systematic strategy, MBXIX aims to enhance risk-adjusted returns. This fund represents a departure from the conventional, providing investors with exposure to a broader opportunity set. While it may not completely eliminate downside risk, it offers a more robust approach to portfolio construction.
To further strengthen a portfolio, incorporating strategies like Rational Equity Armor (HDCTX) can be invaluable. This fund employs optionality to protect against market downturns while capturing upside potential. When combined with a fund like MBXIX, it creates a multi-layered defense against market volatility. By constructing an alternative basket that includes these diverse investment approaches, investors can potentially improve overall portfolio performance and achieve a higher level of risk-adjusted returns.
Building a Resilient Portfolio
The traditional 60/40 portfolio, once a bedrock of investment strategy, is facing increasing challenges. The persistent low-interest-rate environment and heightened market volatility have exposed its limitations. Today’s investors urgently require a more diversified approach. This necessitates the creation of an “alternative basket” that complements traditional equities.
By blending time-tested asset classes with innovative investment strategies, investors can build portfolios that are more resilient to market downturns while capturing upside potential. Combining funds like Milburn Catalyst (MBXIX) and Rational Equity Armor (HDCTX) offers a compelling framework. MBXIX’s systematic approach to global asset allocation provides diversification benefits, while HDCTX’s option-based strategy offers downside protection.
Strategically allocating assets across these complementary funds can significantly enhance a portfolio’s risk-return profile. This layered approach is essential for investors seeking to navigate the complexities of today’s market and achieve long-term financial goals.
Disclaimer:
Past performance is not indicative of future results. Investing involves risk, including the loss of principal. Diversification does not guarantee a profit or protect against loss in declining markets.
If you’re seeking to elevate your investment strategy, consider exploring alternative investment options. Schedule a consultation with our team to discuss how we can help you build a more resilient portfolio.
