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: manager risk, macroeconomic risk, interest rate risk, strategy risk, mark-to-market risk and liquidity risks.
The world and investment landscape continue to evolve at a rapid pace. Below, we address some of our clients’ most-often asked questions regarding absolute return strategies in the current environment.
We recognize that the world is more complicated and volatile today than it has been in many years, and recent events have intensified the stress on investors. We have observed over many years, and strongly believe today, that the value of absolute return strategies and active management are greatest during times of rapid and extreme changes like those we are seeing.
For example, the ability for hedge fund investors to be nimble and responsive to the risks during the Covid-19 pandemic allowed many of them to avoid holding investments in businesses that proved to be structurally impaired, and take advantage of businesses whose growth would be accelerated. And today, amid the Russia-Ukraine conflict, rising interest rates, rising inflation, and elevated risk of recession, we believe actively managed absolute return strategies are well-positioned to withstand the tumultuous markets due to their ability to mitigate (and/or profit from) downside risks and avoid being in “stranded” assets.
In short, we believe turmoil can upend or exacerbate existing economic and behavioral trends in any environment, and absolute return strategies are built to adapt to changing conditions. Conversely, traditional long-only allocations and “autopilot” strategies have proven to be less resilient during such periods.
One particularly risky aspect that has emerged from recent events has been the trend of “deglobalization” – the movement toward a more local supply chain at the expense of global trade. This shift toward the domestic production of goods and services is contributing to inflation by creating higher costs, and thus adversely affecting businesses and investments. These inflationary pressures are likely to persist (exacerbated by high energy costs) and investors should consider this new paradigm in adjusting their portfolio positioning. As discussed further below, we believe absolute return strategies are an effective tool for this purpose.
Both rising rates and rising inflation are typically headwinds for financial assets. Price/earnings ratios for stocks typically decline during such periods, while long-only fixed income investments struggle as rising rates impair the value of existing holdings. This has recently led to one of the worst fixed income drawdowns on record.
While absolute return strategies are not immune to broad market movements, the performance of such strategies has generally been better in higher rate environments than in low-rate ones, such as the near zero interest rate policy (ZIRP) environment we have experienced frequently since the GFC.
The reasons for this improved performance are identifiable and consistent, and we believe will be similar as we go forward in 2022 and beyond:
We continue to see the resiliency of absolute return strategies, particularly regarding downside mitigation. In the last few market drawdowns, including the two highlighted below, these strategies have delivered on their value proposition to mitigate downside while capturing meaningful upside relative to long-only strategies.
As a result, many institutional investors are increasing allocations to absolute return strategies. Industry assets climbed to an all-time high at the end of 2021, with over $4 trillion.[1] This level of investment bears-out the fact that that absolute return strategies are a global and robust industry.
Other trends we are seeing:
For more about why we believe absolute return investments are particularly important components of a properly diversified portfolio, read the Case for ARS series.
For more on GCM Grosvenor’s absolute return strategies capabilities click here.
We explore the value hedge funds can deliver in today’s fast-changing market and break down ten common beliefs about hedge funds, cutting through the noise to separate myths from reality.
We address three commonly asked questions about how absolute return strategies are faring in today’s rapidly evolving investment landscape.
Important Disclosures
For illustrative and discussion purposes only.
No assurance can be given that any investment will achieve its objectives or avoid losses. Past performance is not necessarily indicative of future results.
The information and opinions expressed 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
[1] Source: HFR, Inc., www.HFR.com
The HFRI Fund Weighted Composite Index is being used under license from HFR, Inc, which does not approve of or endorse any of the contents in this report.
We offer clients a broad range of tailored solutions across strategies, including multi-strategy, macro, relative value, long/short equity, quantitative strategies, and opportunistic credit. Levaraging our large scale and presence in the industry, we are able to offer clients preferntial exposure to hard-to-access managers and seek to obtain terms that can drive economic and structural advantages.
