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Hedging our bets

We live in uncertain times. How do we aim to protect our portfolios as we head into 2017?

Recent political upsets have served as a reminder, if any was needed, that one needs to pay particular attention to the hidden risks which can build up within alpha-seeking portfolios.

Our current overall positioning has a defensive look to it. We have reinforced our underweight view of risk-centric equity long/short allocations. In contrast, our view on the outlook for CTAs has moved to outright positive based on our central case of an increase in asset-price volatility going into year-end as capital markets cope with a probable U.S. interest-rate hike and digest continuing political uncertainty.

In such times, discretionary macro and CTAs require further disaggregation to zoom in on approaches that have fared better in policy-driven markets. In particular, our CTA book is biased towards shorter-term trend-following strategies. These have shown themselves more agile at rotating exposure quickly as trends changed or new trends emerged. For example, shorter-term and counter-trend CTA strategies have done a good job at registering outsized positive gains during the January selloff and the immediate aftermath of Brexit. In contrast, we feel that it is part of our mandate to steer our portfolios away from consensus-type positions that are currently popular within longer-duration CTA strategies.

Mindful of the need to reduce correlation with traditional credit investing, we have also focused in on some of the more esoteric and less liquid strategies in this space. These include areas such as litigation finance where the returns achievable may be both interesting and less aligned with the ever more policy-driven traditional credit markets. All this has served us well in 2016. It may also help us to avoid or even profit from the surprises we may encounter on an all too regular basis, as we head into 2017.

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