CATALYST FUNDS RESEARCH
ADDING ALTERNATIVES: Beyond Crisis Alpha
July 2018 | Public Version
To structure a portfolio that can withstand various market environments–a “beyond crisis alpha” portfolio–investors must leverage the power of diversification. Nobel Memorial Prize winner Harry Markowitz demonstrated that by diversifying, an investor gets the benefit of expected reduced risk at a given level of return. As investors increase the number of uncorrelated strategies in their portfolio, the estimated probability of a loss in a given year declines dramatically. Additionally, investors can optimize expected returns at a given level of volatility by adding uncorrelated strategies.
A “beyond crisis alpha” approach relies on several strategies all exhibiting low correlation to each other and to the broad markets. Examples include Managed Futures and Systematic Alpha strategies. Managed Futures strategies implement trading methods that involve going long or short in futures contracts diversified across global futures markets (e.g., diversified by trading strategy, geography and asset class). Systematic Alpha strategies refer to sources of return for risk taken that are systematically accessible, beta neutral and persistent. The strategies categorized today as Systematic Alpha come in many shapes and sizes. Examples include volatility strategies, momentum models and commodities, currencies and rates carry strategies.
Adding uncorrelated strategies to a portfolio reduces the probability of a loss
in a given year
in a given year
Estimated probability of loss in a given year based on an equally weighted portfolio of uncorrelated strategies each with an expected 5% annualized return and 10% annualized volatility.
ADDING UNCORRELATED STRATEGIES TO A PORTFOLIO REDUCES THE ESTIMATED PROBABILITY OF A LOSS IN A GIVEN YEAR
Leveraging multiple uncorrelated strategies to optimize return at target volatility
Expected return at various correlation levels based on an equally weighted portfolio of strategies each with an expected 5% annualized return and 10% annualized volatility and assumes leverage to achieve volatility target.
EXPECTED PORTFOLIO RETURN INCREASES AT A TARGET VOLATILITY LEVEL BY ADDING
UNCORRELATED STRATEGIES
UNCORRELATED STRATEGIES
Past performance is no guarantee of future results. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.
4913-NLD-7/23/2018
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