/ MARKET RISKS /
“ These are extremely volatile quantitative trading strategies , but they have a very low correlation to equities ,” he explained . “ And that ’ s the point : diversifiers should be chosen on correlation , not volatility . That can mean having to employ nerves of steel , but it usually means better portfolio performance overall . Of course , with diversifiers , it ’ s important to know their bones , and why and how they meet the objectives of the overall portfolio .”
BARBELL STRATEGY Luke Newman , manager of the Henderson UK Absolute Return fund , is also wary of inflation . However , the amount of uncertainty in the market has led him to protect against this trend via a barbell strategy – meaning he is hedging his bets either way .
“ On one side , we ’ ve increased our long positions in banks and other financials – business models that should benefit from any inflationary pressures and an acceleration of the interest rate cycle ,” he said .
“ On the other side of the equation , we think it is still too
“ In single sectors , consistency is a very rare commodity ”
early to dispense with many of the higher quality ‘ bond proxy ’ and compounding yielding areas of the market .”
“ Even if we see a gradual normalising of interest rates globally , this will be coming off a very low base and the hunt for yield will continue to dominate financial markets . We believe good quality businesses that can compound their cash flows and deliver a steady growing stream of dividends to their investors continue to offer value .”
GOING SHORT Newman also has some exposure to short positions , but is using them to play a theme that seems to have bypassed many investors amid the political excitement of last year .
“ Minimum wage legislation across the developed world is good news for vast swathes of the electorate , but potentially bad news for significant areas of the economy ,” he explained .
“ Many companies within sectors such as leisure , government outsourcing and retail may see their margins coming under pressure , and their share prices therefore look perilous at current levels . We have positioned accordingly and , having already seen a number of profit warnings that can be attributed to this trend , we expect it to continue into 2017 .”
ANTI-FRAGILITY Aside from the more traditional deflationary and inflationary hedges such as medium-dated US Treasuries and physical gold ETFs , Jupiter Absolute Return manager James Clunie makes use of more asymmetric and “ antifragile ” instruments – meaning those that thrive on volatility .
These include deep out-of-themoney put options on the renminbi ( as a hedge against a sharp Chinese devaluation ), deep out-of-the-money
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