Systematic global macro strategies are a timely means of diversification

Institutional investors face a series of difficult market signals resulting from recent spikes in inflation, the potential for reduced fiscal and monetary support, continued low interest rates and high stock valuations. In addition, the recent shift to a positive correlation between bond performance and that of equities has challenged the negative correlation regime of the past decade.

“It’s important for investors to assess what returns they should expect from bond and equity portfolios going forward. And whatever the next step, maybe it won’t offer the same diversification that has worked for them in the past, ”said Adam Rej, head of macro research at Capital Fund Management (CFM). “Now is a good time to diversify your portfolio away from buy and hold strategies, and systematic global macro strategies can be a great source of diversification.”

Systematic Global Macro Strategies (SGM) “could offer excellent low correlations with bond and equity markets. They can potentially offer strong long-term returns, and they also offer exposure to other asset classes, such as commodities and currencies, ”said Rej, noting that CFM is a fully quantitative fund manager. and systematic.

“At CFM, our strategies are backed by a multitude of cutting-edge data sets, many of which require substantial computing power to become useful. This allows us to glean information that more traditional active managers might have difficulty identifying. “

Deciphering the Inflation Signals

With the recent breakthrough of the Consumer Price Index above the lows of the past decade, investors are trying to read the tea leaves of inflation, as well as the Federal Reserve’s intentions to cut back. its asset purchase program to support the economy.

“There are several factors indicating higher price appreciation – there are monetary and fiscal policies, supply chain disruptions and housing market appreciation,” Rej said. “There is also the base effect due to the fall in prices in the first months of the pandemic. All of these factors make current inflation readings strong by recent standards. “

But “for inflation to return, long-term inflation expectations would have to soar. A commodity super-cycle, for example, could be a trigger. We do not yet see any sign of a substantial change in long-term inflation expectations, ”he said. However, “there are certainly upside risks,” he added.

Inversion of correlations

While bond and equity valuations are relatively wealthy by historical standards and have so far delivered strong returns for core portfolios, Rej said he was not so bullish on their valuations. future performance. “We still don’t know how the Fed will react to inflation risk in the medium term,” he said. “The withdrawal of fiscal and monetary support could challenge, or be the litmus test of, these assessments.”

Additionally, investors have relied on the negative correlation between bond and equity performance in recent years to hedge against each other. However, the duration and extent of the positive correlation between stocks and bonds in 2021 could suggest a potential return to the positive correlation regime between bonds and pre-2000 stocks, he warned. “If so, that’s bad news for portfolios focused on bonds and stocks. The advantage of investing in these two traditional asset classes lies in their negative correlation, ”he said. “The lower the better.”


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