Press Release of the Day – 1st July

A new Golden Age for Hedge Funds

Dixon Boardman, CEO & Founder, Optima Asset Management and Vice Chairman, Forbes Family Trust, is pounding the table urging investors to make room in their portfolios for alternative investments, because their ability to hedge can provide much needed downside protection and diversification during volatile times for equities. He also believes hedge funds have the potential to be an important alternative to fixed income. As he points out, “Government bond yields are at rock bottom and remain vulnerable to increasing inflation.”

Boardman has a unique perspective on where we are in the investment cycle today, contending that investors should be diversifying their portfolios to deal with a coming era of heightened economic uncertainty and market volatility. “Markets have entered an Age of Anxiety. I think we are going to see an extended period in which investor sentiment swings between extremes of optimism, anticipating a return to normality, and pessimism, worrying that the recent pandemic will have damaging economic, social, and political aftereffects that will persist longer than expected.”

Nevertheless, Boardman is emphatic that this does not mean that we are mired in a deep economic depression or extended bear market. “Quite to the contrary,” he says, “Investors with a long horizon should do well with equities. But – and this is an extremely important ‘but’ – in the intermediate term I believe it will be very difficult to generate meaningful returns in conventional asset classes.”

Dixon Boardman is a seasoned veteran of alternative investing. A pioneer in the fund-of-funds business, Boardman established Optima Asset Management (“Optima”) over 32 years ago. Today the firm offers a wide range of multi-manager and single-manager funds, as well as custom-built programs for institutions and high net worth investors. Because of its experience and expertise in alternative investments, Optima was acquired last year by FWM Holdings, the parent company of Forbes Family Trust.

In Boardman’s view the pandemic is not only a once-in-a-lifetime shock to the global economy but also a critical inflection point for markets. Although a new phase of monetary easing is underway, accompanied by fiscal stimulus, especially in the US, Boardman says we are in completely uncharted waters now.

Market moves have been unprecedented. Stocks plunged into a deep and sudden slide in March, only to rebound just as dramatically in April and May. “Does that mean that we are back to normal? Of course not,” says Boardman. “We have yet to see the full impact of the pandemic on the economy. Consequently, investors who believe that the downdraft in corporate earnings is only a brief interruption of the prior trend are opening themselves up to potentially significant risk.”

In Boardman’s assessment, the radical shift in the investment environment requires a change in investors’ thinking. “During the bull market, liquidity and low interest rates dampened volatility, so ‘buying the dip’ and sticking with high-momentum stocks were the keys to outperformance,” notes Boardman. “For the foreseeable future, though, I think that strategy will struggle, because uncertainty about economic fundamentals will outweigh liquidity and low interest rates.”

So, what is the role for hedge funds in a portfolio that Boardman sees in these times of COVID-19? “COVID-19 is not the real issue – volatility and market disruption are,” says Boardman. “The pandemic may have been the catalyst for the most recent bout of volatility and market disruption, but throughout the past four decades of financial history, one key role for hedge funds has been to provide diversification for investors’ overall portfolios by dampening the downside.”

Boardman concedes that hedge funds as a group underperformed over the past ten years, but he makes two important points in their defense. “First, by definition hedge funds shouldn’t be expected to outperform the indices in a bull market to the extent that they do hedge. Second, there are hedge funds and there are hedge funds – in other words, they are not all the same. Some are very aggressive – and some of those types of hedge funds did outperform – and some are very conservative – they are designed to produce stable returns that are uncorrelated to conventional markets.”

Boardman has a broad overview of the hedge fund sector: “Interestingly, the consensus among the older generation of hedge fund managers is that this is a time for caution. In contrast, many of the younger managers seem to be more constructive, not so much about the market but about specific investment ideas for which they have an enthusiastic conviction. It is therefore critical to be highly selective about managers and to have a keen understanding of their ability to manage risk. Keep in mind the old saying about aviation: there are bold pilots, there are old pilots, but there are no old bold pilots.”

Strategically, Boardman believes that there are at least three specific areas of opportunity that stand out: “First, long/short specialists with expertise in healthcare and biotech are well-positioned to benefit from secular trends as well as COVID-related opportunities in the sector. Second, strong economic growth in Asia appears to be a durable secular trend, so regional specialists have the opportunity to take advantage of investment opportunities especially in China and India. Third, ongoing volatility creates trading opportunities, so a well-diversified mix of macro and market neutral strategies has the potential to produce stable, high single-digit returns, which is especially attractive relative to the very low yields on Treasuries.”

The bottom line for Boardman is that hedge funds should be part of a well-diversified portfolio. Boardman offers three essential reasons for this: “Over a full market cycle hedge funds can reduce correlations to conventional asset classes, improve downside protection, and provide potential upside.”

The recent market dislocations and volatility underscore the need for investments with these characteristics. As Boardman notes, “Hedge funds’ ‘edge’ versus conventional money managers is their ability to concentrate positions in their highest conviction ideas, express those ideas long and short, and actively manage exposures to dampen volatility and mitigate the downside. In my opinion, this may well be the new golden age for hedge funds.”

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