Downside Protection with Institutional Alternative Investments.

Hedge funds have historically demonstrated the ability to provide portfolio ballast during periods of market turbulence.

Downside Protection Banner Graph

¹Annualized Performance. Jan 1, 1990 - July 31, 2019 • Geometrically Linked AACRs. Source: Cambridge Associates, Sep 2019. See detailed disclaimer below.

March 18, 2020

Protect your clients' portfolios from market volatility

Volatility diminishes the rate at which investments grow over the long term and has a negative relative impact on portfolio returns. Minimize risk and preserve capital with institutional hedge fund exposure.

Downside Protection Vol Chart

After 10 years, the investment with the lowest volatility delivered higher returns than the investment with the highest volatility by nearly $400,000, simple average annual return for all investments being the same at 5%.

"Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn’t...pays it." - Albert Einstein

This analysis is for illustrative purposes and not meant to show actual performance.
These volatilities are approximations. Actual volatility is 5.27%, 15.81% and 26.35%, respectively.
*The actual volatility for the S&P 500 is 12.70% from January 2010 – February 2020.

Hedge Funds Historically Deliver Downside Protection

"More than 90% of the hedge-fund managers were able to outperform the global equity market during the month, exemplifying the downside protection afforded by hedged strategies as opposed to long-only portfolios," Eurekahedge.

HFRI 500 Relative Value gains in February, as global equities plunge on contagion fears.

In February 2020, fixed income-based Relative Value Arbitrage (RVA) strategies led industry performance, with gains in Convertible Arbitrage and Volatility exposures offset by declines in Yield Alternative and Corporate fixed income strategies. The investable HFRI 500 Relative Value Arbitrage Index advanced +0.8 percent, while HFRI Relative Value (Total) Index posted a narrow decline of -0.1 percent. RVA sub-strategy performance was led by the HFRI RV: Convertible Arbitrage Index, which gained +1.8 for the month, as well as the HFRI RV: Volatility Index and HFRI RV: FI-Sovereign Index, each of which advanced +0.3 percent in February. Offsetting these gains, the HFRI RV: Yield Alternatives Index fell -3.0 percent for the month.

Source: HFRI. HFRI 500 relative value gains in February, as global equities plunge on contagion fears.

Annualized Performance

Janurary 1, 1990 - July 31, 2019
Percent (%) • Geometrically
Linked AACRs

Downside Protection Graph

Hedge funds have demonstrated to provide portfolio ballast during periods of market turbulence.

In the nearly 30 years since 1990, there have been seven periods where the S&P 500 declined more than 15% from peak-to-trough on a daily basis. Indeed, hedge funds outperformed equities in every downturn over the past 30 years, with a median decline of 5.0%.

* Hedge Fund data begin on January 31, 1998 and captures six of seven drawdown periods.
Sources: Barclay Trading Group, Bloomberg Index Services Limited, Hedge Fund Research, Inc., Intercontinental Exchange, MSCI Inc., Standard & Poor’s, and Thomson Reuters Datastream. MSCI data provided “as is” without any express or implied warranties.
Notes: S&P drawdowns represent price declines of greater than 15%. All returns are total returns, except gold, for which returns are based on changes in the spot price. Asset classes represented by the following: Gold Bullion Prices (“Gold”), Bloomberg Barclays US Treasury Bond Index (“US Treas”), ICE BofAML 91-Day Treasury Bill Index (“Cash”), S&P 500 Index (“US Equities”), MSCI EAFE Index (“EAFE”), MSCI EM Index (“EM”), Bloomberg Barclays US Corporate High-Yield Index (“HY Bonds”), and Barclay BTOP50 Index (“Trend Following”). Hedge fund data are represented by a proxy blend of 50% Hedge Fund Research (HFRX) Absolute Return Index and 50% Hedge Fund Research (HFRX) Equity Hedge Index. Trend following data are through June 30, 2019.

Source: Cambridge Associates, Sep 2019

Past performance is not indicative of future results.

Private Equity has Demonstrated a Lower Risk of Catastrophic Loss.

Stocks are 13X riskier than a buyout PE Fund.

The data supports PE’s ability to weather downturns. J.P. Morgan analyzed the Russell 3000 Index (which represents approximately 98% of the investable U.S. equity market) between 1980 and 2014. They found that during recessions, two-fifths of publicly listed equities have experienced “catastrophic loss,” defined as a 70% or greater drop from their peak values. Yet less than 3 out of 100 PE funds have suffered a similar loss.

Downside Protection Bargraph

Source: Hamilton Lane, Market Overview 2017-2018

Past performance is not indicative of future results.


In this environment where volatility is increasing and uncertainty prevails, it's important to diversify, both your business and your clients' portfolios, with assets that may provide downside protection. Portfolios built with downside protection in mind aim to protect capital and steadily compound growth, and may deliver a smoother pattern of returns that have historically helped investors weather volatility and reach their long-term goals.

Provide Downside Protection to your RIA Business and your Clients' Portfolios with Institutional Alternative Investments.

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