Most of us grew up knowing the phrase, “third times a charm”. Few know the true origin of this phrase, yet blindly accept its meaning being, the third time we try something, we are likely to succeed. In the case of the stock market, the unavoidable and eminent third collapse of the market since 2000, will certainly not be the charm we need. Euphoria will turn to disaster, and the worst possible outcome will become reality. Investors will leave the game and lose faith in the public market.
When the predominant fundamentals inflating the market are artificial, such as they are today, declines will be less predictable and more impactful. Absent of any sustainable fundamentals, a market almost entirely controlled by the central bank and institutional traders, has little attraction for ordinary investors. Those investors will be left holding losses when those in control “deleverage” their risk. Don’t be fooled by lazy asset allocators, who use a so called, “diversified approach”. This euphoric asset bubble involves both the stock and bond markets. Security in this kind of balanced portfolio is invalid, and investors will be crushed.
Some smart investors have been aggressively liquidating holdings directly affected by the public markets, in anticipation of an imminent collapse. We are among those who have begun to reduce our exposure to the public markets. Where appropriate, we believe that a strategy of up to 70% of assets invested in both liquid and illiquid alternative investments will be very successful moving forward. Our selection of alternative investments is an intensive process, which attempts to avoid virtually any investments that have performance directly tied to the appreciation of the S&P 500, and stability of the bond market.
The central bank institutions have congratulated themselves on saving the economy because they artificially inflated stock and bond prices. These efforts will undermine investor confidence for years to come. Alternative strategies offer investors an opportunity to invest successfully while avoiding these inflated asset prices. Success will be attributed to the rigorousness in which investors seek such opportunities. We must remember, “Opportunity does not knock, it presents itself when you beat down the door.”
The above chart compares the returns of the HFRI Fund Weighted Composite Index (hedge fund index), and the Barclay’s US Managed Futures Industry BTOP 50 index, to the S&P 500 from 12/31/1999 to 12/31/2012.
The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager hedge funds that report to the HFR Database. It does not include Funds of Hedge Funds.
The Barclay’s US Managed Futures Industry BTOP 50 index seeks to replicate the overall composition of the managed futures industry with regards to trading style and overall market exposure. The largest investable trading advisor programs, as measured by AUM, are selected for inclusion in the BTOP 50. Chart:Bloomberg
