Performance is still paramount
As asset owners evaluate alternatives managers’ recent performance relative to traditional betas, we believe it is important to consider whether the experience of the last ten years is likely to persist. Though traditional betas’ strong returns are well-understood, Figure 1 shows just how consistent this outperformance has been relative to hedge fund returns.
For investors that expect the beta-friendly environment to continue indefinitely, low-cost beta would be a logical allocation. Conversely, for investors that believe that there is a high probability of a recession in the near future, increasing cash balances would be an understandable change.
In our view, it is more likely that the increasingly volatile environment that began in Q1 2018 will continue. We believe alternatives are well-suited to weather such an uncertain market given their ability to create value through security selection and tactical changes to their net and gross exposures.