Looking For Portfolio Protection?


A couple of months ago I wrote about a suite of market neutral funds from AGFiQ. Click through to learn about the funds. The last five days serves as a microcosm for how any diversifier might do in the face of a serious decline. The current decline could turn in to something serious but at this point it most clearly is not, it is still in the realm of down a little and down a little goes with the territory of engaging in markets. Following up on yesterday's post I use diversifiers (liquid alts) as part of my defensive strategy when a serious decline seems more likely.

I was most interested in the AGFiQ US Market Neutral Anti-Beta Fund (BTAL). BTAL goes long low beta stocks and short high beta stocks. This chart shows what the IIV of the fund has done in the five days before today (the fund's volume is low such that the chart of the market price wouldn't be useful.

It appears to have done what I might hope for in the face of a downturn, again it just tracks five days but it is promising as an indication of how it might do. Consistent with what I have said many times, this is not a long term hold. It is down dramatically in the last few years of the current bull market, it really isn't an equity proxy, it should be expected to do poorly in a raging bull market. Any interest I would have would be to protect in a bear market.

The second chart is AGFiQ's other market neutral funds, the time is slightly different as you can see by the chart but captures much of this dip's performance. I think BTAL would be a little more effective than the others in a serious decline but the suite accounted for itself pretty well.

The way I would size something like this would be at 3-5% of the equity portion of clients portfolios. In the face of a downturn it would, assuming it met expectations, grow to hedge more and more of the portfolio as the long holdings declined in value.

I can't stress enough the importance of having the correct expectations and using things like this properly. BTAL should not expected to be an equity proxy in bull markets. Any potential allocation should be small and timely. I also want to stress that none of my indicators (200 dma, inverted yield curve, 2%rule) tell me it is time to get defensive.