Keeping an eye on downside risks with liquid alternatives

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Robert Steiner, Sales Director, Franklin Templeton Switzerland

The current situation in the stock and bond markets is unsettling many investors and new approaches are being sought. Robert Steiner of Franklin Templeton Switzerland sees good reasons for investing in Liquid Alternatives resp. Multi-strategy and multi-manager approaches are talking.

Financial markets are challenging right now: the massive expansion of central bank balance sheets in developed countries since 2008 ends. The enormous liquidity glut that has caused prices to rise around the globe is gradually ebbing away. "We see increased volatility, sharp corrections and rising inflation. In addition, macroeconomic uncertainties threaten the stability of the markets", says Robert Steiner, Sales Director, Franklin Templeton Switzerland.

He thinks going forward, the biggest challenge may be that traditional diversification via bonds and equities may not prove successful in this new market phase especially as markets begin to feel the pressure of rising interest rates.

Steiner sees good reasons for Liquid Alternatives in this market situation. This term describes hedge funds that can be traded on a daily basis, i.e. liquid, and that retail investors can also buy. Specifically, those liquid alternatives with a multi-strategy and multi-manager approach may prove valuable to equity and bond portfolios due to their diversification effects. A multi-strategy, multi-manager portfolio consists of several standalone hedge fund strategies (multi-strategy component) whose day-to-day operations are managed by external hedge fund managers. Each of these hedge fund managers specializes in a particular hedge fund strategy that performs different tasks in different market situations.

Risk and return characteristics of hedge fund strategies
Hedge fund strategies have historically delivered good long-term returns compared to traditional asset classes (See Fig. 1). Their good performance during this period was mainly due to the fact that they fared much better than traditional assets during the bursting of the new-economy bubble in 2001-2002 and the financial crisis of 2008-2009, Steiner explains. At the same time, hedge fund strategies have often been relatively stable during periods of strong equity markets, he said. When risks are compared to returns, the risk from all of the hedge fund strategies is more in line with bonds, while their returns are comparable to stocks (See fig. 1).

Rising interest rates bring opportunities for long-short strategies
During the last 10 years, interest rates have been kept artificially low for the most part, according to Steiner. Here's how less economically well-off companies have been able to survive without problems thanks to relatively low financing costs. "But if interest rates gradually rise as z.B. In the U.S., we often see larger valuation differentials among companies in certain sectors", he says. The recent winners have been the highly liquid technology companies, which have been able to escape from sectors with higher debt ratios such as z.B. Have been able to significantly outperform in the utilities sector. The separation in the value development influenced by the effects of higher interest rates thus creates an alpha opportunity.

Lower downside risk under extreme market conditions
The extent to which hedge fund strategies help reduce downside risk can be demonstrated by the most extreme periods of negative equity market conditions in the past 20 years, Steiner says. Hedge fund strategies would have held up comparatively well in the five one-month periods when global equities suffered the biggest losses. Example September 2002: stocks lost 11 percent, hedge funds only 2 percent; October 2008: stocks lost 19 percent, hedge funds only 7 percent. Or in 2018, the most difficult year for stocks on record: in February, stocks lost more than 4 percent, while hedge funds lost 1.8 percent. In October, equities fell 7.3 percent while hedge funds lost less than half that too.

"The current situation on the stock and bond markets poses challenges for investors. Macroeconomic risks such as those related to geopolitical hot spots, the opposing monetary policies of major central banks, rising interest rates and inflation can threaten market stability. Hedge fund strategies offer investors valuable opportunities to diversify their portfolios" Draws Steiner Conclusion.

In the long term, the energy crisis is accelerating the path to net zero emissions. (Image: Shutterstock.com/bilanol)

Russia's invasion of Ukraine has triggered an energy crisis. But that shouldn't stop countries from implementing their net-zero targets, say experts at Schroders.

More e-cars were bought in the UK in March 2022 than in all of 2019. This is despite the downturn in the small vehicle market and supply chain issues that currently make it difficult to purchase an e-vehicle. Even before the recent rise in energy prices, the switch to electric cars was in full swing. But the price increase due to high oil prices makes conventional combustion engines unattractive for consumers.

"Prices for gas and coal are now four times higher than a year ago. As a result, the economics of renewable energy sources have improved significantly in comparison", Felix Odey, Portfolio Manager of the Schroders Global Energy Transition Team, explains.

Russia's invasion of Ukraine had exacerbated oil and gas price increases at a time when energy costs were already rising. The lack of investment in recent years has led to a shortage of newly developed reserves in the oil and gas markets. One thing is certain: energy companies were reluctant to extend support. "The international focus on reaching net zero means that management teams have had to turn away from oil production without knowing what demand there will be for their end products in ten years' time", Odey explains.

Fewer and fewer investors are also willing to finance the development of new fossil fuels, he said. This mixed situation caused tight supply in the market, price increases and strong returns in the conventional energy markets.

Covering with renewable energy

The net-zero challenges facing countries were known even before the war of aggression on Ukraine: How to make economies independent of fossil fuels while ensuring energy security? What has changed, he said, is that these factual issues are now front and center. The current energy crisis is likely to change the path taken towards net zero. Some countries could bring forward CO2 emissions as they ramp up power generation to avert the cost pressures of rising electricity and gas prices from consumers.

"Something positive, especially in Europe, is that policymakers have responded to the energy security crisis these days with plans for greater use of renewable energy", says Alex Monk, portfolio manager of the Schroders Global Energy Transition Team. Although more fossil fuels would be used in the short term, renewables dominate the energy mix in the medium- to long-term strategy.

On the part of policymakers, this is a first, Alex Monk points out: "If the energy crisis had happened earlier, I don't think that would have been the standard response. A political turn has taken place." The conclusion: countries whose CO2 emissions will increase in the coming years would have to increase the pace of decarbonization. In other words, a significant expansion of renewable energies is needed. This is the only way to achieve the net-zero targets.

Ukraine war accelerates energy transition in the longer term

The Federal Republic of Germany is considered as a good example. The government passed a far-reaching reform to triple renewable energy sources by 2030. This is to ensure energy security in the wake of Russia's invasion of Ukraine. Some European and U.S. politicians also suggested more employees should work from home offices. This would reduce the amount of fuel needed for transportation.

Despite these measures, Europe is consuming more coal and gas. That means countries must meet their emissions targets faster than planned. Some British politicians would have been in favor of more incentives to install solar panels on roofs, as well as cutting red tape with regard to renewable energy sources. But so far, only small actionable steps have been taken in this area.

Alex Monk further argues that much more can be done. Consumers could reduce their electricity bills by further incentivizing solar installations. This would additionally help the country meet its emissions targets. "In the long term, the Ukraine crisis is a support for the energy transition. The short-term slowdown on the part of policymakers does not matter", he adds.

However, such programs tend to benefit the middle class rather than those who need it most. It is impossible for the poorest in society to pay for solar panels, even with reduced prices. The cost-of-living crisis has plunged millions into poverty: many have to consider whether to heat or eat. "Governments are faced with serious factual issues. To what extent can they reduce energy costs without widening the gap between rich and poor?? A short-term solution could be increased use of coal and gas", says Alex Monk.

Life is full of unexpected surprises, and some of them can really hurt your budget. Emergency situations such as repairing a car, replacing an appliance, paying a high medical bill or an unexpected trip can deplete your savings or cause you to make unwise decisions that could affect your financial future.

Johnson tells Investopedia that answering these questions is the first step to increasing financial literacy. You need to decide how much money you need. If it's a worst-case scenario like a layoff, develop a household budget first. "Add up all your expenses: fixed, like car insurance and mortgage, and variable, like groceries and entertainment."

Once you determine how much money is needed, you are ready to evaluate ways to reach your goal.

Automatic savings in a separate account

Instead of keeping all your money in one account, Johnson recommends putting it in a separate emergency savings account. "If you just say you're going to save more and leave it in a joint checking or savings account, you won't be able to see the money grow," Johnson explains. However, he says it's an incentive to keep it in a separate account where you can see it grow.

In addition to the money into a separate account a certain amount is withdrawn regularly. Chris Britt, co-founder and CEO of San Francisco-based banking app Chime, tells Investopedia, "Instead of deciding what to save each week or month, sign up for an automatic savings plan."

So how much should you put in your emergency fund? Dave Harding, president of Hardin Financial Group in Troy, Michigan, recommends 10% of your income until you have at least three months of income saved up. "Replace any money spent from the fund as soon as possible, or the emergency fund will only work once," Harding warns.

Consider interest rates and cash back options

Sometimes a few small steps can lead to significant savings. "Maximize your dollar by choosing a banking option that offers cash on debit purchases," advises Britt. It also recommends taking interest rates into account when choosing a savings account, as the money from premiums and rates can add up over a period of time.

Pay off debts

Your financial obligations may limit the amount you can contribute to your emergency fund. Britt recommends paying more than the monthly minimum, which will reduce the growing interest costs and allow you to pay off the debt faster so you can add that money to your emergency fund.

And Joe Heider, founder of Cirrus Wealth Management in Cleveland, Ohio, says, "Take a look at your credit card debt to see if you might be able to roll that debt into a lower interest rate and use the savings to start an emergency fund."

Get a part-time job

Consider using your skills by getting a part-time job to generate additional income for your emergency fund. Harding warns that timing is critical. He says working to save money for a future crisis is fine, but it won't help if you need the funds now.

He also recommends "special" income from bonuses and tax returns to your emergency fund .

Sell, scrap or pawn your assets

Most people have accumulated unused items that take up space and collect dust. Johnson recommends selling anything you no longer use. "The same can be said for excess metal in the garage, such as copper pipes, aluminum and steel, which can be sold to a scrap yard," Johnson says. He says old brass chandeliers can also be sold in the attic and recommends pawning jewelry that has little or no sentimental value.

Refinance Your Home

If you have equity in your home, Heider recommends Investopedia readers refinance it. "Although interest rates have gone up, they are still low and now is a good time to do so and use savings in an emergency fund."

Other strategies

Dolph Janis, founder and owner of Clear Income Strategies Group in Charlotte, North Carolina, offers three more tips to help save money:

" Ordering water instead of a drink with lunch / dinner. Take the extra € 3.00 and put it later in a savings account. Do the math if you do this ten times a month, that's an additional $360 savings per year.

Check your phone bill. Need both a home phone and a cell phone? Need this plan? You could easily save $40 per month here, or another $480 per year.

Check your cable or satellite bill. Do you need all of these channels? Potential savings here of $35 per month, that could be another $420 per year. "

Janis concludes these three changes will save you an additional 1 each year.Could save $260 by distinguishing between needs and wants. p>

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