Is Market Neutral Investment strategy is attractive for volatile markets?

Global stock markets surged in July in a dramatic post-Brexit rally that was also fueled by hopes of expansionary monetary policies. U.S. stock indices reached consecutive all-time highs. European stocks also advanced more than 3.5% during the month, with the London FTSE 100 Index reaching fresh one-year highs. Even in Japan, one of the world’s most volatile markets, stocks surged nearly 7% following Prime Minister Shinzo Abe’s convincing upper house election victory, which set the stage for new rounds of economic stimulus. The result is a tug of war over the markets.

Fidelity executive vice president of retirement income and investment strategies, John Sweeney says, “Nothing causes investors to question their strategy and worry about their money like dramatic moves in the markets.” He also notes that: “A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run.”

However, periods when volatility exceeds inconceivable borders, may be the best times for investors and traders. If you remember the best five-year return in the U.S. stock market began in May 1932 – in the midst of Great Depression. The next best five-year period began in July 1982 amid an economy in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates.

Accordingly, it may not be advisable to leave the market when it is highly volatile. It may be better to choose the right investment tools and reap the benefits. Sweeney considers that: “market volatility should be a reminder for you to review your investments regularly and make sure you have an investment strategy with exposure to different areas of the markets – U.S., small and large caps, international stocks, investment grade bonds – to help match the overall risk in your portfolio to your personal goals.”

 

Let’s look at one of the market neutral investment strategies called Statistical Arbitrage. How does it work? Market neutral investment strategies have roots dating from 1949, when Alfred Winslow Jones operated the first hedge fund holding both long and short positions in securities. Over the past 60 years, the popularity of this approach has risen dramatically to where today it is estimated that investors have committed approximately $40 billion to market neutral strategies. The concept behind market neutral strategies seeks to create a portfolio that is insulated from the ups and downs of the market and can deliver positive returns regardless of market direction. Market neutral portfolios hold long and short positions. In their most traditional form, these positions are dollar neutral such that the value of the long positions is offset equally by the value of the short positions. Due to the offsetting long and short positions in the portfolio, market neutral portfolios historically have lower volatility than the overall equity market. Market neutral equity strategies seek to deliver returns in excess of Treasury Bills.

George Soros, the highest earning Hedge Fund Manager, recommends investing in one of those market neutral strategies called as Statistical Arbitrage (Stat Arb) as this strategy shows absolute returns focused on generating consistent positive yield on shares. Similar strategies are successfully used by the world’s leading hedge funds to generate stable returns while reducing volatility in portfolios. Every investment company has its own unique approach and the management system, where they show different profits per annum. GL Asset Management originally established in Switzerland as Blumfeldt & Sons, has been considered the Hedge Fund Manager of the Month in Europe, and has mostly concentrated on Stat Arb. Siegfried Spitzer, Portfolio Manager of Equity trading and Stat Arb, stated that trading exclusively on US exchanges in liquid stocks with market capitalization of over $3bn, the price is exploited by imbalances with the help of using mathematical models and rigorous risk management system. On average the strategy seeks to generate 12% annual return with 2% volatility, thus enabling stable appreciation of investment, while minimizing market risk. Investors face long odds in trying to time the ups and downs of the market, and hedge fund managers increase their allocations to stocks ahead of downturns and decrease their exposure just prior to market rallies.

Rather than focusing on the turbulence, wondering if you need to do something now, or what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan. A good plan will help you ride out the peaks and valleys of the market, and may help you achieve your financial goals.