Diversification as a defensive alternative for 2023
The name of the game for the year that’s now behind us was clearly “volatility” as most money markets experienced a sequence of ups and downs that kept investors and money managers alike guessing for direction. Looking ahead into 2023, will this change and should we expect calmer seas?
In our opinion, that will not be the case. Granted, the main drivers of volatility, namely the raise in interest rates and the geopolitical troubles seem to have somewhat eased but for equities and currencies, the road ahead will still be bumpy. Inflation seems to have eased a bit but this could prove transitory, interest rates do continue to point higher and the driving force of the US IT sector is signaling a considerable round of layoffs.
So where can investors and managers look for returns in the months ahead? Our guidance points towards diversification of return factors, both in terms of the markets and instruments that would generate profits but also in the strategies that would be employed to do so. Especially in the systematic trading sector, where the vast majority of models either look for trending environments or hunt for reversals toward the mean price of instruments, an unclear outlook mixed with various wild-card factors could be challenging, as the recent past has shown.
Contrary to the above, our systematic models look for two things: a) statistically significant, repeatable patterns in the price action of major currencies, that stem from historically proven driving forces that permeate the geopolitical or macroeconomic trends and b) for inefficiencies in the relative pricing of closely-correlated single equities, where a transient factor has driven prices apart but should very quickly become normalized again.
These approaches, both systematic but different in nature and practice, have allowed us to create a truly uncorrelated and diversified portfolio that yields positive returns regardless of the economic backdrop. As an example, our commingled Diversified strategy that deploys both models described above, has returned approximately 25% in annualized gains over the past 6 years, having navigated some of the most unusual and volatile periods in recent history.
And has done so, with a non-existent correlation to any mainstream markets or indices, underpinning that the return drivers have nothing to do with central banks’ QE or QT efforts, a geopolitical trend, or anything of that sort.
Given the prevailing uncertainty in the money markets’ outlook for the year ahead, we feel strongly confident that 2023 will be yet another positive period for our Diversified strategy and we invite you to have a friendly conversation with our team on how it can add value to your holdings and act as a driver of return for your portfolio
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