Safer With an Active Asset Management Approach Than with None or a Passive One

In the light of multiple discussions raised in AP community about strategies that help investors through market downturns, we would like to share a perspective on advantages of an active asset management approach or so-called actively traded hedge-fund strategy based on the example of a classic long-short US equity strategy.

The stock market indices are currently down 25-40%, and many investors are panicking trying to get rid of value-shedding portfolio assets. Is there anything investors can do to protect their funds and spare themselves an unnecessary nerve-wracking experience? The answer is yes, actively traded long-short hedging approaches can generate sustainable positive returns over the entire short-term to a mid-term lifetime of an investment portfolio.

What sets a robust, efficient, actively traded global investment portfolio strategy apart from other portfolio management strategies is the ability to generate a stable return on the managed assets in times of market turmoil and decline while bringing down the associated risks to a minimum.

Consider the following: when markets are bullish it is not difficult to get a good return and paying steep management fees to a fund manager may seem like a waste of money. However, the bullish bonanza eventually passes, and markets go into decline, which typically happens every 2-3 years, and sometimes even more often. And when the plunging bear market sets in investors face a risk of losing all their earnings gained over the years.

Conversely, an actively traded long-short approach would earn smaller returns than S&P and other major indexes’ returns in a rallying bullish market, but it would also protect investors’ earnings from a potential partial or a complete wipeout when the markets hit the slump keeping the funds’ drawdown losses to a minimum.

What you can see in the chart below is that in certain periods the returns of the S&P or the Nasdaq outperformed the returns of active asset management strategy. But in the end, the average annual returns of American stock indexes and the returns generated by our long-short strategy worked out the same.