Why Choose a Hybrid Investing Approach?
If you are a golfer, there is a good chance you have a hybrid club in your bag. 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, including:
- You don’t need to give up your equity exposure. Many financial advisors find it difficult to simply get out of equities despite being concerned about the market.
- You get a potential tail risk 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 severe equity market declines.
- In theory, an investor has the potential to realize more exposure for each dollar invested. Because many managed futures strategies attempt to provide notional leverage in a minimally correlated manner, it is possible to get over $1.00 of exposure for each $1.00 you invest. However, if participating in this strategy, there is no guarantee this will be the case.
The interactive Catalyst Insights Allocator Tool lets users understand the historical impact of implementing a hybrid strategy into a traditional 60/40 stock/bond portfolio.
By clicking on a box below, it will show the impact of taking a certain percentage away from the equity allocation and reallocating that to a 70/70 hybrid strategy (70% managed futures exposure/70% equities exposure). For example, the 10% Hybrid Strategy Allocation means that you reduce your equity exposure from 60% to 50% and then allocate that 10% to a hybrid strategy for a 50/40/10 portfolio.
The results demonstrate that allocating to a hybrid strategy historically improved a traditional 60/40 portfolio’s return, while reducing drawdowns during periods of volatility. Please note that there is no guarantee that any investment will achieve its investment objectives, generate returns, or avoid losses.
70/70 Equity/Managed Futures Hybrid Strategy Allocator Tool
As with any investment strategy, there is no guarantee that an asset class will continue to perform similarly in the future. Investment markets are unpredictable and there will be certain market conditions where a strategy will not meet its investment objective and will lose money. Returns will vary and you could lose money investing in managed futures and those losses could be significant. Please note that investing in derivatives (which include options, futures and other transactions) may give rise to leverage risk (which can increase volatility) and can have a significant impact on performance. Investing in the commodities markets may subject managed futures to greater volatility than investments in traditional securities. Using derivatives like futures and options to increase long and short exposure creates leverage, which can magnify potential for gain or loss and, therefore, amplify the effects of market volatility.
The indices shown are for informational purposes only and are not reflective of any investment. As it is not possible to invest in the indices, the data shown does not reflect or compare features of an actual investment, such as its objectives, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal or return, or tax features. Past performance is no guarantee of future results.
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.
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.