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What Golf and Investing Can Tell Us About the Benefits of a Hybrid Approach

Key Takeaways

  1. 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.
  2. 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.
  3. 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.
  4. 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.

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.

Growth of $10,000: Hybrid Strategy, S&P 500, and 60/40 Portfolio (Logarithmic Scale)

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.

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