We are looking back on a year full of tensions – for the people, through the burdens caused by rising prices, the energy crisis and the news of the war of aggression in Ukraine – but also on the stock exchanges. The following chart illustrates this clearly:
Equity and bond returns 1977 – 2022
Please note: the past performance of an investment is not indicative of its future development.
A result like the one for 2022, with double-digit losses for shares and bonds at the same time, has actually been unique in a historical time series of almost 50 years. The financial crisis of 2008/09, for example, came with a positive bond result.
The main reason for this was the very determined approach of the international central banks with rapid increases in key-lending rates. These were and are necessary to contain and reduce the exploding inflation.
Positioning of alternative investments
How did alternative investments perform over the year? Let us look at “liquid” alternative investments, i.e. strategies that can be traded daily or weekly. This distinguishes them from “private markets” with longer maturities. First, we look at the main strategies available:
Liquid alternative strategies
| Alternative strategy | How does it work? |
| Managed Futures (CTA): “Multi-asset with short positions” | A so-called multi-asset fund looks at all asset classes. The fund can either be invested (“long”) or switch to cash. Managed futures funds do exactly that – and they can additionally be invested in “short” positions, i.e. they benefit from falling prices in an asset class. This is done systematically: computer models continuously process the prices of all asset classes. The criteria are set once and are then no longer changed. |
| Global Macro: “Multi-asset with short positions” | A so-called multi-asset fund looks at all asset classes. The fund can either be invested (“long”) or switch to cash. Global macro funds can also be invested in “short” positions, i.e. they benefit from falling prices in an asset class. This is done on a fundamental level: fund managers evaluate and take the decisions. |
| Long/short equity: asymmetric equity fund | This strategy includes equity funds that aim to participate more in a rising equity market than in a falling one. Incidentally, this form of hedge is what gave hedge funds their name. |
| Long/short equity Market-neutral: alpha on the basis of share selection | Equity fund managers aim to generate “alpha”, or added value, through the expert selection of shares. This is always related to the general market risk of shares. This strategy is set up in the same way, but neutralises the market risk, i.e. constantly hedges it. Thus, a form of equity selection know-how is offered separately from the market risk. |
How did 2022 turn out for the various strategies?
- Managed futures: Very successful. The trump card: we bet on falling bond prices (government bonds and corporate bonds in almost all financial centres), which for months had been going in only one direction. Also, the funds were positioned for a stronger US dollar (the strength of the US dollar against the euro resulted from the expected energy bottleneck in Europe, which ultimately did not materialise). In equities, there was no clear entry signal for managed futures. This left one out for better or worse.
- Global macro: Fund managers did not jump at the trend of falling bond prices with conviction. They expected inflation to remain temporary. For equities, on the other hand, the situation was very mixed over the year: weak months were followed by strong ones. The development was difficult to assess.
- Long/short equity: The intended asymmetry actually occurred when comparing the years 2020 and 2021 (with strong gains) and 2022 (a moderate loss). In a dramatic equity year, it was impossible to generate a positive result.
- Long/short equity market-neutral: Q1 was unfavourable for equity selection. 2021 had been growth year with a better development for companies and their shares in the growth segment. This sentiment suddenly turned to value at the beginning of January 2022. As a result, substance shares outperformed growth equities. Value and growth are not the only factors, but they have a variety of effects. Many fund managers were unable to make up for the first quarter by the end of the year, resulting in a slightly negative result.
In total, a very good result for managed futures, a balanced or slightly negative result for global macro and long/short equity market neutral, and a moderately negative result for long/short equity. Alternative investments thus substantially outperformed equities and bonds.
Conclusion
Portfolio diversification was hard to achieve in 2022. Alternative investments stood out from the tense environment and are substantially ahead of equities and bonds in the performance ranking.
Alternative strategies expand the investment toolbox by additional degrees of freedom. The multi-strategy fund Alpha Diversified 3 represents our contender in this area.
Advantages for the investor
- UCITS-compliant Absolute Return Fund.
- Broad diversification across a variety of investment styles and managers.
- Foreign currency exposure is hedged.
Risks to be considered
- Asset class cannot be compared with traditional asset classes.
- The net asset value can fluctuate significantly.
- Limited (weekly) redemption of shares.
- Limited transparency of subfonds.
- Possibility of a total loss.
- Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Legal note:
Prognoses are no reliable indicator for future performance.