Systematic Relative Strength

Bloomberg Businessweek has a nice article about how small investors are currently embracing hedge fund-like strategies. One of the most prominent hedge fund strategies is global macro, in which the manager has the freedom to forage among all kinds of global asset classes. At Dorsey, Wright we offer exposure to a global macro strategy through both a separate account (Global Macro) and a mutual fund (Arrow DWA Tactical Fund, DWTFX).

Retail investors are intrigued for a couple of reasons. After large losses in 2008, investors seem to be more willing to explore alternative asset classes and to experiment with a more tactical approach. There may also be some level of disenchantment with strategic asset allocation, which did not perform as expected during the last bear market.

According to the article, one of the significant attractions of hedge fund-like strategies is this:

Hedge funds as an asset class have a high correlation to equities during bull markets and a low correlation during bear markets…

This is certainly true of our global macro asset class rotation strategy using a systematic relative strength criterion. If you dig into our recent white paper on asset class rotation, you can see how the portfolio beta ranges up and down in different environments.

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Source: Dorsey, Wright Money Management

The big shift in perspective, though, has to do with the level of allocation to tactical strategies. In the core-satellite approach, tactical or global macro approaches were typically considered as part of the satellite package and were given small capital allocations. That has changed rather dramatically. According to one fund manager interviewed in the article [my emphasis]:

…while the tactical approach is labeled “alternative,” it’s not attracting the typical alternative-asset allocation of 3 percent to 5 percent. “More often, [retail investors] are making this a core allocation. We’re getting a 35% core allocation typically because advisors don’t think they’re getting return expectations or risk [protection] out of traditional strategies.”

We’ve seen much the same thing since the launch of our popular Global Macro separate account last year-very often this portfolio is operating as a core allocation for clients.

What has caused the change in mindset? Clients appear to be interested in the strategy for multiple reasons. Some clients gain comfort that it can hold growth assets-but it’s not necessarily locked into holding them in difficult markets. Other clients seem to be attracted by the fact that the menu is broad and encompasses domestic and international equities, fixed income, currencies, commodities, real estate, and inverse funds. Like all global macro strategies, that leaves it free to pursue returns wherever they may be. Other clients focus on the ways in which our portfolio is different: unlike an actual hedge fund, for example, our portfolios do not employ leverage and have a much higher level of transparency than a traditional global macro fund.

Whatever the reasons, it seems that tactical global allocation is increasingly being considered part of investors’ core allocation.

To obtain a fact sheet and prospectus for the Arrow DWA Tactical Fund (DWTFX), click here or call Jake Griffith at 301-260-0163.

Click here for disclosures. Past performance is no guarantee of future results.