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Alpha Peak Managed Portfolios

Improving Portfolio Construction

The Challenge With Traditional Portfolios

For years, a 60%/40% stock-to-bond mix was thought to be the optimal starting point for properly diversifying client portfolios. And why not? As you know, the formula evolved from the Modern Portfolio Theory concept which won a renowned economist the Nobel prize. The theory is best known by a diagram called the Efficient Frontier which shows how a series of portfolios perform when designed to maximize returns for an assumed level of risk.

 

Source: S&P 500 and Barclays Aggregate Bond Index, Past performance is not indicative of future returns. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.

Unfortunately, when studied over 10-year increments (which are more representative time horizons for most investors' ever-changing needs), the efficient frontier doesn't perform quite so efficiently. Markets are dynamic and the 60/40 model performs wildly different over narrower periods of time, often to the detriment of clients' original intent.

 

Source: S&P 500 and Barclays Aggregate Bond Index, Past performance is not indicative of future returns. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.

Recognizing these wide variances in performance, is it possible to forecast what the next decade will look like? Probably not, which raises the larger question about the suitability of the 60/40 model.

How Institutions Invest

For advisors interested in exploring strategies that might enhance client portfolios, one needs to look no further than how institutions invest. These are the private college and university endowments with the size, resources and investment aptitude to access any investment in the world and to invest wherever they believe the best opportunities reside. Just where are those opportunities? The numbers answer that question.

 

Source: Nacubo. Fiscal year 2018. Past performance is not indicative of future returns. Allocations should not be considered investment advice and are not meant to represent a fund.

 

A Fertile Field

Institutions largely find these alternative opportunities in the hedge fund world. It's where premier managers from the traditional asset management environment migrate to the hedge fund industry seeking greater opportunity. Most of these managers have a significant amount of their net worth at risk in their strategies. These managers apply their strongest conviction ideas and strategies which they believe will provide the best performance in the future. It's also where experienced hedge fund managers have unconstrained access to new instruments, strategies and most of all, talent, to use and apply these forward-looking strategies within their funds.

This forward tilt is what makes these alternative funds so compelling and so attractive to sophisticated investors. 

 

Perspective on Performance 

These non-traditional strategies, as a broad asset class, are widely recognized for their ability to provide greater portfolio diversification and superior risk-adjusted returns; in many cases, equity-like returns with half the risk. That's best illustrated by taking a long view (28 years) of risk-adjusted returns of the the primary and composite hedge fund indices as tracked by Hedge Fund Research, Inc, the preeminent voice in this alternative industry. 

 

Source: HFR, JAA, Bloomberg. Past performance is not indicative of future returns. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

Unfortunately, these indices can not be invested in. Fortunately, there is a way to access strategies designed to replicate the indices. 

 

The New Efficient Frontier

Recognizing how the addition of alternative strategies can improve the risk-adjusted returns of portfolios constructed with traditional assets, the question is not just how much allocation to alternatives, but also how to allocate.

Certainly. And when portfolios that incorporate alternatives are dynamically weighted and managed, the improvements in performance can be striking as this illustration shows:

Source: S&P 500, Barclays Aggregate Bond Index, HFRI Event Driven Total Index, HFRI Equity Hedge Total Index, HFRI Macro Total Index, HFRI Relative Value Total Index, and Thomson Reuters Private Equity Buyout Index. The total allocation to HFRI Indices and Thomson Reuters Private Equity Buyout Index is constrained to a maximum allocation of 50%. Additionally, Private Equity is constrained to a maximum 20% allocation. Past performance is not indicative of future returns. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.

Portfolio efficiency increases dramatically by adjusting the alternatives’ sub-components to the corresponding risk level. How much can this impact performance in a portfolio? Just consider this illustrative example of a $100,000 investment and the superior portfolio growth of 50% alternative portfolio which is dynamically weighted and managed over two decades.

Illustrative Example of Risk

 

Source: S&P 500, Barclays Aggregate Bond Index, HFRI Event Driven Total Index, HFRI Equity Hedge Total Index, HFRI Macro Total Index, HFRI Relative Value Total Index, and Thomson Reuters Private Equity Buyout Index. The total allocation to HFRI Indices and Thomson Reuters Private Equity Buyout Index is constrained to a maximum allocation of 50%. Additionally, Private Equity is constrained to a maximum 20% allocation. Past performance is not indicative of future returns. Investors cannot directly invest in an index and unmanaged index returns do not reflect any fees, expenses, or sales charges.

 

The Answer to the Advisors' Dilemma

Advisors see the value of using alternatives in client portfolios but few have either the time or resources needed to properly evaluate the thousands of different strategies available and constantly monitor and adjust the allocations of those strategies into their traditional portfolios.

They also know that adding just a single alternative strategy, like managed futures or non-traded REITs to a client portfolio built with just traditional asset classes, is a less than optimal approach.

To illustrate just how challenging it is to diversify with a proper blend of alternative strategies, just look at how vast the alternative universe is.

Source: HFRI Hedge Fund Research site: https://www.hedgefundresearch.com/sites/default/files/pdf/HFRI_formulaic_methodology.pdf

 

Now, consider this universe expands exponentially because each one of these sectors represents hundreds, if not thousands, of distinct strategies. Further, as illustrated below, these strategies are also global, regional and encompass emerging and frontier markets. 

Source: HFRI Hedge Fund Research site: https://www.hedgefundresearch.com/sites/default/files/pdf/HFRI_formulaic_methodology.pdf

 

The Alpha Peak Model Solutions

Our suite of 24 managed portfolios was created to provide this alternative universe to you for use in helping build better portfolios for your clients. We make the selection process very simple:

Total Model Solutions

If you'd like to use us as your total model solution, we offer portfolios constructed with both traditional and alternative asset classes. All portfolios are risk-managed, meaning:

1.  They provide highly diversified portfolios where the inter- correlation of all represented asset classes and strategies are continuously managed so traditional and alternative portions are properly balanced.

2. The portfolios are dynamically weighted according to risk-return characteristics. For example a more conservative portfolio will have a heavier weighting to Relative Value when compared to a more aggressive portfolio which have a Private Equity allocation.

3. The alternatives portion provide downside risk protection and additional alpha opportunities that are differentiated and not generally attainable in long only portfolios. This results in a smoother ride. 

Key portfolio characteristics:

We use inexpensive ETFs for each long-only traditional asset class in a factor-based rotation model.

We add the appropriate alternative sectors for each risk profile

The models are dynamically weighted for appropriate risk-return characteristics

For risk managed, income optimized, the same process takes place and we just optimize for income

These risk managed portfolios are based upon different client risk return objectives and are offered in seven models ranging from capital preservation to aggressive growth. 

To view the risk-managed models, click here.

To view the risk-managed income optimized models, click here.

Alternative-Only Model Solutions

If you use traditional long-only portfolios, we make it easy to incorporate alternatives by offering alternative-only models across the risk spectrum. We go even one step further, however. If you use passive investments in your portfolios, we offer passive-only alternative models in five different risk profiles, from capital preservation to aggressive growth. If you construct client portfolios using both passive and active investments, we offer passive+active models in five risk profiles, from capital preservation to aggressive growth. 

To view the alternative only passive models, click here.

To view the alternative only passive + active models, click here.

 

This information should not be relied upon as investment advice, research, or a recommendation by James Alpha or Alpha Peak regarding (i) the Funds, (ii) the use or suitability of the model portfolios or (iii) any security in particular. Only an investor and their financial advisor know enough about their circumstances to make an investment decision.

Carefully consider the James Alpha Funds within the model portfolios' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting  https://www.jamesalphaadvisors.com/prospectuses. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns.

The Alpha Peak Model Portfolios are provided for illustrative and educational purposes only, do not constitute research, investment advice or a fiduciary investment recommendation from James Alpha to any client of a third party financial advisor (each, a “Financial Advisor”), and are intended for use only by such Financial Advisor as a resource to help build a portfolio or as an input in the development of investment advice from such Financial Advisor to its own clients and shall not be the sole or primary basis for such Financial Advisor’s recommendation and/or decision. The Alpha Peak Model Portfolios themselves are not funds.

There is no guarantee that this investment strategy will achieve its objectives, goals, generate positive returns, or avoid losses. Liquidity and/or diversification does not ensure profit or protect against loss.

Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.

Not FDIC Insured • May Lose Value • Not Bank Guaranteed

IMPORTANT

The Alpha Peak Portfolios include investment funds and strategies managed by James Alpha Advisors. You should also familiarize yourself with these funds here.

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