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- Hybrid strategies seek to provide investors an option for more versatility in their portfolios, including the potential to participate in equity upside while still maintaining a tail risk hedge.
- Historically, a 70/70 Hybrid Strategy (70% notional exposure to managed futures and 70% exposure to equities) has significantly outperformed by generating more consistent returns.
- We believe the key to success with hybrid strategies is taking a long-term allocation approach. Hybrid strategies are not designed to react to short-term noise, but rather structural market changes.
- Integrating a Hybrid Strategy into a 60/40 Portfolio to create a 30/40/30 Portfolio has historically improved a portfolio’s performance and risk metrics.
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Despite being practically nonexistent 20 years ago, hybrid golf clubs are now used by most professional golfers, regularly part of a golfer’s set, and in two-thirds of golf iron sets sold today. A hybrid golf club borrows designs from both irons and woods. It was created out of a need to get more versatility and consistency. This offers an interesting parallel to investing. Hybrid investment strategies, especially those that combine equities and managed futures, offer many potential advantages in today’s market environment, including:
1.You don’t need to give up your equity exposure. The bull market is long in the tooth, but many financial advisors find it difficult to simply get out of equities.
2.You get a potential hedge for structural market changes. Historically, managed futures have performed well in periods of market turmoil. A managed futures strategy overlay on an equity portfolio provides the potential for meaningful positive returns in the overall portfolio even during equity market declines.
3.You get more notional exposure for each dollar invested. Because managed futures strategies can provide notional leverage in an uncorrelated manner, it’s possible to get well over $1.00 of exposure for each $1.00 you invest.
70/70 Hybrid Strategy: 70% notional exposure to Managed Futures and 70% exposure to Equities. Rebalanced monthly. 60/40 Portfolio: 60% exposure to Equities and 40% exposure to Bonds. Rebalanced monthly.
S&P 500 Total Return Index (Equities), Bloomberg Barclays US Aggregate Bond Total Return Index (Bonds), and Barclay CTA Index (Managed Futures) monthly return data from December 1979 to December 2019. 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 funds’ shares and should be viewed as a long-term investment. Past performance is no guarantee of future results.
The Potential Benefits of Hybrid Strategies
A Hybrid Strategy offers a potentially compelling opportunity for those that are concerned about the potential for an equity market drawdown yet do not want to necessarily give up equity exposure. For example, replacing $1.00 in equity exposure with $1.00 in exposure to a 70/70 Hybrid Strategy provides $0.70 in managed futures exposure while still maintaining $0.70 in equity exposure. Historically, a Hybrid Strategy has offered more consistent returns as a result of lowering correlation to the S&P 500 and reducing the impact of equity market drawdowns.
There is no assurance that any investment strategy will generate profits or avoid losses. Past performance is no guarantee of future results.
Based on monthly return data from December 1979 to December 2019. Source: Bloomberg LP.
A Hybrid Strategy Has Exhibited a Lower Rolling Three-Year Correlation to the S&P 500 TR Index than a 60/40 Portfolio
Setting Expectations for Hybrid Strategy Performance
Just as you would keep a hybrid golf club in your bag, we believe that a hybrid strategy may be a valuable addition to your portfolio. Setting the right expectations may help prevent investors from getting in their own way. It is easy to say that investors shouldn’t get too caught up in short-term performance but far more difficult to execute on an ongoing basis. We recommend using rolling returns to position this allocation mindset.
Positive returns in 92.6% of rolling 3-year periods
A Hybrid Strategy has delivered positive returns during 92.6% of rolling 3-year periods. The S&P 500 TR Index only delivered positive returns during 86.7% of rolling 3-year periods.
Rolling 3-Year Return Analysis (December 1979 – December 2019)
| 70/70 Hybrid Strategy | S&P 500 TR Index | |
| Number of 3-Year Periods | 445 | 445 |
| Average 3-Year Annualized Return | 14.72% | 12.06% |
| Best 3-Year Annualized Return | 42.50% | 33.30% |
| Worst 3-Year Annualized Return | -6.38% | -16.09% |
| Standard Deviation of 3-Year Periods | 10.12% | 10.05% |
| Profitable Periods (%) | 92.6% | 86.7% |
| Average Profitable Period Return (Annualized) | 16.09% | 15.06% |
| Unprofitable Periods (%) | 7.4% | 13.3% |
| Average Unprofitable Period Return (Annualized) | -2.40% | -7.53% |
Positive returns in 99.8% of rolling 5-year periods
The worst 5-year rolling return for a 70/70 Hybrid Strategy was -1.11% versus -6.63% for the S&P 500 TR Index. Furthermore, the S&P 500 TR Index exhibited negative rolling 5-year returns 11.6% of the time.
Rolling 5-Year Return Analysis (December 1979 – December 2019)
| 70/70 Hybrid Strategy | S&P 500 TR Index | |
| Number of 5-Year Periods | 421 | 421 |
| Average 5-Year Annualized Return | 14.41% | 11.67% |
| Best 5-Year Annualized Return | 37.55% | 29.63% |
| Worst 5-Year Annualized Return | -1.11% | -6.63% |
| Standard Deviation of 5-Year Periods | 8.79% | 8.05% |
| Profitable Periods (%) | 99.8% | 88.4% |
| Average Profitable Period Return (Annualized) | 14.44% | 13.45% |
| Unprofitable Periods (%) | 0.2% | 11.6% |
| Average Unprofitable Period Return (Annualized) | -1.11% | -1.81% |
There is no assurance that any investment strategy will generate profits or avoid losses. Past performance is no guarantee of future results.
Based on monthly return data from December 1979 to December 2019. Source: Bloomberg LP.
Allocating to Hybrid Strategies
Allocating to a Hybrid Strategy may make a lot of sense if investors are using some variation of a traditional 60/40 portfolio (60% to equities and 40% to bonds). For each $1.00 in 60/40 exposure (corresponding to $0.60 equities and $0.40 bonds), simply take $0.30 from the equity allocation and invest that into a 70/70 Hybrid Strategy. The result is a 30/40/30 Portfolio (30% equities, 40% bonds, and 30% Hybrid Strategy). The actual exposure for each $1.00 invested becomes $0.51 to equities (versus the $0.60 before), $0.40 to bonds (same), and $0.21 to managed futures. This approach would have significantly outperformed a 60/40 Portfolio on most standard investment metrics. Furthermore, the total equity exposure was only reduced by $0.09 per $1.00 to therefore get exposure to managed futures, which has served as a tail risk hedge for structural market change.
Integrating a Hybrid Strategy into a 60/40 Portfolio Would Have Historically Improved Performance & Risk Metrics
| 30/40/30 Portfolio | 60/40 Portfolio | Benefit | |
| Annualized Return | 11.41% | 10.37% | +1.04% |
| Standard Deviation | 8.74% | 9.47% | -0.74% |
| Return/Risk | 1.31 | 1.09 | +0.21 |
| Maximum Drawdown | -25.62% | -32.54% | +6.92% |
| Profitable 3-Year Periods | 95.28% | 90.34% | +4.94% |
There is no assurance that any investment strategy will generate profits or avoid losses. Past performance is no guarantee of future results.
30/40/30 Portfolio: 30% exposure to Equities, 40% exposure to Bonds, and 30% exposure to a 70/70 Hybrid Strategy. Rebalanced monthly.
Based on monthly return data from December 1979 to December 2019. Source: Bloomberg LP.
Hybrid Strategy Fund ≠ Managed Futures Fund + Equities Fund
Many investment professionals mistakenly believe that they can recreate the benefits of a hybrid strategy by simply allocating to a managed futures product and an equity product. From an underlying fund construction perspective, this is incorrect because the notional exposure per dollar invested in the two individual funds will typically be dramatically lower than the notional exposure of a hybrid strategy. Additionally, the discipline required to maintain a managed futures position during periods when equity markets are rallying, and to increase that allocation to maintain proper exposure, is difficult for most investors. The outflow from managed futures during recent years highlights how investor psychology continues to get in the way of long-term objectives.
Allocating $1.00 to a 70/70 Hybrid Strategy Equals $1.40 in Exposure:
Allocating $1.00 separately to Managed Futures and Equities Equals Only $1.00 in Exposure:
GLOSSARY OF TERMS
Barclay CTA Index: A leading industry benchmark of representative performance of commodity trading advisors. The Index is equally weighted and rebalanced at the beginning of each year. The index only publishes monthly returns.
Bloomberg Barclays US Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
Correlation: A statistical measure of how two securities move in relation to each other.
Drawdown: A measure of the peak to valley loss of an investment for a stated time period. An investment does not recover from a drawdown until it surpasses the previous peak.
S&P 500 Index: A market capitalization-weighted index that is used to represent the U.S. large-cap stock market. The Total Return (TR) Index reflects the effects of dividend reinvestment.
Standard Deviation: A statistical measure of how consistent returns are over time; a higher standard deviation indicates historically more volatility.
Managed Futures exposure from a standalone product provides 100% exposure to a managed futures program. Only a minor portion of the product’s assets are required as collateral for the managed futures program. On the other hand, the $0.30 not invested in equities for the 70/70 Hybrid Strategy is more than enough to collateralize 70% exposure to a managed futures program.
There is no assurance that any investment strategy will generate profits or avoid losses. Past performance is no guarantee of future results.
Based on monthly return data from December 1979 to December 2019. Source: Bloomberg LP