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The Case for Absolute Return Strategies - Part One

June 7, 2021

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Past performance is not necessarily indicative of future results. No assurance can be given that any investment will achieve its given objectives or avoid losses. Unless apparent from context, all statements herein represent GCM Grosvenor’s opinion.


Select risks include strategy risks, manager risks, market risks, and structural/operational risks. 

In the series, “The Case for Absolute Return Strategies” we discuss why we believe absolute return investments are important components of a properly diversified portfolio. Through charts and succinct commentary, we’ll explore the following topics in a four-part series over the coming weeks:

  1. Challenges faced by traditional “60/40” asset allocation strategies (see below)

  2. Tailwinds for absolute return strategies
  3. The importance of selecting elite managers
  4. The current opportunity set for hedge funds

Challenges faced by traditional “60/40” asset allocation strategies1

In this installment, we look at indicators of how asset markets are highly valued and future returns appear constrained, particularly in bonds. 

In the Next Installment

In Part 2 of the series, we’ll explore tailwinds that we believe can contribute to return and alpha generation within absolute return strategies. Such tailwinds include high levels of dispersion, two-way markets, periods of dislocation, strong growth in the number of tradeable publicly listed companies, and the historical resilience of alpha through inflationary environments. In parts 3 and 4 we will look at the impacts of rising industry AUM, the value of talent selection and the focus on high-quality firms, as well as the market opportunities in absolute return strategies. 

1 Forecast returns are constructed assuming a 60% equity, 40% fixed income portfolio in which the returns of each component are based on the outputs of a linear regression of the realized 5-year forward S&P 500 returns relative to the initial 1-year forward price to earnings ratio from 1990-2016 for equities, and a similar regression of the realized 5-year forward returns of the Bloomberg Barclay’s US Aggregate Bond Index against the initial interest rate on the U.S. 10-year Treasury from 1976-2016 for fixed income. These time frames were chosen based on the availability of forward S&P earnings estimates (initially becoming available in 1990), the available history of the Bloomberg Barclay’s US Aggregate Bond Index, and the availability of – year realized returns. Recent period in which forecasts returns fall below zero are driven by negative expected returns within the equity component in the 60/40 portfolio, as the regression model assumes negative 5-year annualized returns in equities following periods where starting P/E multiples exceed 23.2x. 

 

Important Disclosures

For illustrative and discussion purposes only. The information contained herein is based on information received from third parties. GCM Grosvenor has not independently verified third-party information and makes no representation or warranty as to its accuracy or completeness. The information and opinions expresses are as of the date set forth therein and may not be updated to reflect new information. 

 

Investments in alternatives are speculative and involve substantial risk, including strategy risks, manager risks, market risks, and structural/operational risks, and may result in the possible loss of your entire investment. Past performance is not necessarily indicative of future results. The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by GCM Grosvenor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Certain information included herein may have been provided parties not affiliated with GCM Grosvenor. GCM Grosvenor has not independently verified such information and makes no representation or warranty as to its accuracy or completeness. 

 

Data Sources 

Bloomberg Finance L.P.

S&P. S&P and its third-party information providers do not accept liability for the information provided and the context from which it is drawn.