Adding Alternatives: Drawdown Recovery Time Also Matters

CATALYST FUNDS RESEARCH

Adding Alternatives: Drawdown Recovery Time Also Matters

September 2018 | Public Version

The psychological impact of loss may cause investors to make poor decisions that significantly impact their long-term results. Many investors focus on the potential magnitude of loss. However, the amount of time in a drawdown must be considered because an extended drawdown may cause investors to react, potentially at the worst possible time. Following years of central bank intervention fueling the markets, investor psychology today seems unsuited to handle a 10% correction, let alone a sustained bear market. An allocation to managed futures strategies offers a potential solution to position investors to better withstand the next period of market turmoil. Historically an allocation to managed futures strategies both reduced the number of +10% drawdowns and reduced drawdown recovery times.

Investors should consider the following in today’s market environment:

Bank of America Merrill Lynch recently called the “Great Bull” market dead due to slowing growth, rising interest rates and
too much debt.
With massive amounts of liquidity coming out of the markets as quantitative easing comes to an end, both stocks and bonds may experience more frequent +10% corrections and/or sustained drawdowns, potentially concurrently.
The five main asset classes (stocks, bonds, real estate, gold, and cash) may no longer be effective in mitigating portfolio risk.

We believe that managed futures exposure could be effective in mitigating portfolio risk in today’s environment. Historically, implementing managed futures exposure into a portfolio may have resulted in higher returns with reduced drawdowns and lower volatility.

Less Time In a Drawdown: Historical +10% Drawdowns and Recovery Times for Managed Futures and U.S. Equities

More Favorable +10% Drawdown Profile: Historical +10% Drawdowns for Managed Futures and U.S. Equities

Historical +10% drawdowns based on monthly return data for BarclayHedge CTA Index (Managed Futures) and S&P 500 Price Index (U.S. Equities) from January 1980 to June 2018. Drawdown recovery period includes number of months until new high is made (i.e., complete recovery of drawdown) starting at the month of the +10% drawdown. Source: Bloomberg LP. Alternative investments may not be suitable for all investors and an investment in alternative funds is suitable only for investors who can bear the risks associated with the illiquidity of the fund’s shares and should be viewed as a long-term investment.

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.

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8146-NLD-9/26/2018