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UK PROFESSIONAL ADVISERS – IMPORTANT LEGAL INFORMATION
UK PROFESSIONAL ADVISERS – IMPORTANT LEGAL INFORMATION
THIS AREA OF THE WEBSITE IS INTENDED FOR UK PROFESSIONAL INVESTORS. IT IS NOT INTENDED FOR USE BY MEMBERS OF THE GENERAL PUBLIC. FOR INFORMATION ON PRODUCTS AVAILABLE TO MEMBERS OF THE GENERAL PUBLIC, PLEASE REFER TO THE RETAIL INVESTORS SECTION OF THIS WEBSITE.
I CONFIRM THAT I AM A PROFESSIONAL INVESTOR, HAVE READ THE IMPORTANT INFORMATION AND WISH TO PROCEED
IMPORTANT INFORMATION
You must read this before proceeding, as it explains both the legal and regulatory restrictions which apply to the information contained and investment products referred to within this Website.
This Website is directed only at individuals resident within the United Kingdom and the information provided is not for distribution outside the United Kingdom. None of the information, whether in part or full, should be copied, reproduced or redistributed in any form nor should it be regarded as an offer or a solicitation of an offer for investment in countries outside the United Kingdom. No shares or units in these products or funds may be offered or sold to US Persons (as more fully defined in the latest Fund prospectus) or in any other country, state or jurisdiction where it would be unlawful to offer, solicit an offer for or sell such shares or units.
The information on this Website is issued and approved by Franklin Templeton Investment Management Limited and does not, in any way, constitute investment advice. Franklin Templeton Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FCA).
This site uses cookies to improve your online experience. Sites like ours store small text files on your computer when you visit. We use this information to monitor traffic and look for ways to improve the services we offer at www.franklintempleton.co.uk. The cookies we use don't include any information about your personal identity or your accounts. Your browser must accept at least a session cookie to use all the features on this site. For instructions on disabling these files, please visit our cookie policy. By closing this message, you consent to our use of cookies on this site.
The prices of shares and units and income there from can go down as well as up, and you may not get back the full amount invested. Past performance not an indicator, nor a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Where a fund invests in derivative instruments, this entails specific risks that may increase the risk profile of the fund and are more fully described in the Fund’s prospectus and in the relevant KIID. Where a fund invests in a specific sector or geographical area, the returns may be more volatile than a more diversified fund. Emerging Markets can be more risky than developed markets.
Subscriptions for shares or units in any Franklin Templeton Investments product or fund can be made only on the basis of the current prospectus, the relevant Key Investor Information Document (“KIID”), accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter (or other offering document) for that product or fund which more fully describes the investment risks. All or most of the protections provided by the UK regulatory system will not apply to investors in the Franklin Templeton Investment Funds or Franklin Templeton Shariah Funds.The investment activities for Franklin Templeton Shariah Funds will be undertaken in accordance with the Shariah Guidelines. As a consequence, the performance of a Fund may possibly be lower than other investment funds that do not seek to strictly adhere to the Islamic investment criteria. The requirement to “purify” cash holdings or dividend income will likely result in payments being made to charities. The return to investors will be reduced by the amount of such payments.
This website is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of Franklin Templeton Investments’ fund ranges. Nothing in this website should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this website. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author’s at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Any research and analysis contained in this website has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this website or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
Portfolio Holdings for Non-US Funds/Non-US Advisers - From time to time Franklin Templeton Resources Inc (FRI) and its subsidiaries, partnerships, joint ventures and related and affiliated business entities (“FTI”) may provide you with a partial listing of portfolio securities including but not limited to top contributors and detractors to portfolio performance owned by one or more non-US domiciled funds that are registered or passported with local regulatory authorities and are sponsored by FTI (each a “Fund” and together “Funds”) and any such additional information relating to the Fund(s) that may not otherwise be publicly disseminated. Such listing of portfolio securities and any other non-public information is subject to the following terms and conditions below and is herein referred to as “Holdings Information”.
You are an authorised representative of a bank, broker-dealer, insurance company, registered investment adviser or other professional client (together, “Financial Institutions”) engaged in business activities outside the United States (a “Non-US Adviser”) and the Financial Institution has authorised you to access and use the Holdings Information. You are deemed to have read, understood and accepted the terms and conditions and you further agree that all provisions of this Agreement are equally binding upon you and the Financial Institution. IF YOU ARE NOT AUTHORISED TO ACCESS HOLDINGS INFORMATION OR YOU DO NOT WANT TO BE BOUND BY THE TERMS OF THIS AGREEMENT YOU SHOULD NOT ACCEPT HOLDINGS INFORMATION.
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You will not:
Purchase or sell any portfolio securities listed in the Holdings Information on the basis of any information contained in Holdings Information;
Trade against the Funds or knowingly engage in any trading practices that are adverse to FTI or the Funds on the basis of the Holdings Information; and
Trade in shares of any US registered investment company sponsored by FTI that is substantially similar to the Fund.
You will use your best efforts to take all appropriate action and otherwise satisfy your obligations under this Agreement and to prevent the misuse of the Holdings Information. You will immediately notify FTI if you learn of any use of the Holdings Information by any employees, agents or clients that would otherwise violate this Agreement. You acknowledge that damages alone would not be an adequate remedy for any breach of the provisions of this Agreement and, accordingly, without prejudice to any and all other rights or remedies, you acknowledge that FTI or any Fund or F-T Fund to which the Holdings Information pertains shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of the provisions of this Agreement.
You shall not be bound by the provisions of confidentiality contained in this Agreement if such Holdings Information 1) is or becomes publicly known through no act or omission of the Financial Institution, its employees, agents or subcontractors; 2) is lawfully disclosed to you by a third party without restriction and without any obligation of confidentiality; 3) is required to be disclosed by any Governmental body, regulatory body (including without limitation any relevant securities exchange) or court of competent jurisdiction or otherwise pursuant to any statutory or regulatory obligation.
The Agreement shall remain in effect for so long as you access the Holdings Information from FTI. FT may terminate this Agreement immediately if this Agreement conflicts with any laws, rules or relevant regulatory interpretations. Upon termination, you shall continue to take reasonable measures to prevent the disclosure or dissemination of the Holdings Information. You acknowledge that the Holdings Information may be utilised for damaging purposes, such as duplicating FTI’s proprietary investment and trading strategies, techniques and methodologies. As a result, your nondisclosure obligations and the prohibition on your dissemination of the Holdings Information to any third party shall survive this Agreement’s termination. To the extent of any conflict between this Agreement and any other agreement between you and FTI, then this Agreement shall be deemed to constitute an amendment to such other agreement.
This Agreement may not be assigned by you, and you may not delegate its duties hereunder, without the prior written consent of FTI. All of the terms and provisions contained herein shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, successors and assigns. Nothing contained in this Agreement shall be construed as creating any obligation or any expectation on the part of either party to enter into a business relationship with the other party, or an obligation to refrain from entering into a business relationship with any third party.
Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between the parties, it being understood that the parties are independent contractors vis-à-vis one another. Except as specified herein, no party shall have the right, power or implied authority to create any obligation or duty, express or implied, on behalf of any other party hereto.
YOU SHALL INDEMNIFY AND HOLD ANY AND ALL FTI PERSONS HARMLESS AGAINST ANY AND ALL COSTS, EXPENSES, LOSSES, LIABILITIES, OBLIGATIONS, DAMAGES, PENALTIES TO WHICH ANY SUCH PARTY MAY BECOME SUBJECT INCLUDING REASONABLE LEGAL AND OTHER SUCH PROFESSIONAL FEES INCURRED IN INVESTIGATING AND DEFENDING OR APPEALING PENDING OR THREATENED CLAIMS, ACTIONS, SUITS, PROCEEDINGS, ARBITRATIONS, AMOUNTS PAID IN SETTLEMENT THEREOF (COLLECTIVELY “EXPENSES”) DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY BREACH OF THIS AGREEMENT SAVE WHERE SUCH EXPENSES RESULTED DIRECTLY FROM OUR GROSS NEGLIGENCE, FRAUD OR WILFUL MISCONDUCT.
The Agreement: (i) may be modified or supplemented by FTI at anytime upon reasonable notice to You; (ii) shall be binding upon and inure to the benefit of the successors and assigns of FTI and You; and (iii) shall be governed and construed in accordance with the laws of the United Kingdom.
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Institutional Investor Terms & Conditions
UK INSTITUTIONAL INVESTORS - IMPORTANT LEGAL INFORMATION
THIS AREA OF THE WEBSITE IS INTENDED FOR UK INSTITUTIONAL INVESTORS. IT IS NOT INTENDED FOR USE BY MEMBERS OF THE GENERAL PUBLIC. FOR INFORMATION ON PRODUCTS AVAILABLE TO MEMBERS OF THE GENERAL PUBLIC, PLEASE REFER TO THE RETAIL INVESTORS SECTION OF THIS WEBSITE.
I CONFIRM THAT I AM A PROFESSIONAL INVESTOR, HAVE READ THE IMPORTANT INFORMATION AND WISH TO PROCEED
IMPORTANT INFORMATION
You must read this before proceeding, as it explains both the legal and regulatory restrictions which apply to the information contained and investment products referred to within this Website.
This Website is directed only at individuals resident within the United Kingdom and the information provided is not for distribution outside the United Kingdom. None of the information, whether in part or full, should be copied, reproduced or redistributed in any form nor should it be regarded as an offer or a solicitation of an offer for investment in countries outside the United Kingdom. No shares or units in these products or funds may be offered or sold to US Persons (as more fully defined in the latest Fund prospectus) or in any other country, state or jurisdiction where it would be unlawful to offer, solicit an offer for or sell such shares or units.
The information on this Website is issued and approved by Franklin Templeton Investment Management Limited and does not, in any way, constitute investment advice. Franklin Templeton Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FCA).
This site uses cookies to improve your online experience. Sites like ours store small text files on your computer when you visit. We use this information to monitor traffic and look for ways to improve the services we offer at www.franklintempleton.co.uk. The cookies we use don't include any information about your personal identity or your accounts. Your browser must accept at least a session cookie to use all the features on this site. For instructions on disabling these files, please visit our cookie policy. By closing this message, you consent to our use of cookies on this site.
The prices of shares and units and income there from can go down as well as up, and you may not get back the full amount invested. Past performance is not an indicator, nor a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. Where a fund invests in derivative instruments, this entails specific risks that may increase the risk profile of the fund and are more fully described in the Fund’s prospectus and in the relevant KIID. Where a fund invests in a specific sector or geographical area, the returns may be more volatile than a more diversified fund. Emerging Markets can be more risky than developed markets.
Subscriptions for shares or units in any Franklin Templeton Investments product or fund can be made only on the basis of the current prospectus, the relevant Key Investor Information Document (“KIID”), accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter (or other offering document) for that product or fund which more fully describes the investment risks. All or most of the protections provided by the UK regulatory system will not apply to investors in the Franklin Templeton Investment Funds or Franklin Templeton Shariah Funds. The investment activities for Franklin Templeton Shariah Funds will be undertaken in accordance with the Shariah Guidelines. As a consequence, the performance of a Fund may possibly be lower than other investment funds that do not seek to strictly adhere to the Islamic investment criteria. The requirement to “purify” cash holdings or dividend income will likely result in payments being made to charities. The return to investors will be reduced by the amount of such payments.
This website is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of any of Franklin Templeton Investments’ fund ranges. Nothing in this website should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this website. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author’s at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Any research and analysis contained in this website has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this website or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
Portfolio Holdings for Non-US Funds/Non-US Advisers - From time to time Franklin Templeton Resources Inc (FRI) and its subsidiaries, partnerships, joint ventures and related and affiliated business entities (“FTI”) may provide you with a partial listing of portfolio securities including but not limited to top contributors and detractors to portfolio performance owned by one or more non-US domiciled funds that are registered or passported with local regulatory authorities and are sponsored by FTI (each a “Fund” and together “Funds”) and any such additional information relating to the Fund(s) that may not otherwise be publicly disseminated. Such listing of portfolio securities and any other non-public information is subject to the following terms and conditions below and is herein referred to as “Holdings Information”.
You are an authorised representative of a bank, broker-dealer, insurance company, registered investment adviser or other professional client (together, “Financial Institutions”) engaged in business activities outside the United States (a “Non-US Adviser”) and the Financial Institution has authorised you to access and use the Holdings Information. You are deemed to have read, understood and accepted the terms and conditions and you further agree that all provisions of this Agreement are equally binding upon you and the Financial Institution. IF YOU ARE NOT AUTHORISED TO ACCESS HOLDINGS INFORMATION OR YOU DO NOT WANT TO BE BOUND BY THE TERMS OF THIS AGREEMENT YOU SHOULD NOT ACCEPT HOLDINGS INFORMATION.
You undertake to keep the Holdings Information strictly confidential, regardless of the Holdings Information form or whether the Holdings Information is marked or identified as proprietary or confidential. You also agree not to disclose or disseminate the Holdings Information to any third party and to treat the Holdings Information as nonpublic and proprietary, and you further acknowledge that the Holdings Information constitutes a valuable asset of FTI, the Funds and Fund shareholders. You recognise that adverse consequences may result for Fund shareholders if the Holdings Information is used for inappropriate trading purposes. In addition, FTI may reasonably request that you make available to FTI all research produced on the Funds.
You will not:
Purchase or sell any portfolio securities listed in the Holdings Information on the basis of any information contained in Holdings Information;
Trade against the Funds or knowingly engage in any trading practices that are adverse to FTI or the Funds on the basis of the Holdings Information; and
Trade in shares of any US registered investment company sponsored by FTI that is substantially similar to the Fund.
You will use your best efforts to take all appropriate action and otherwise satisfy your obligations under this Agreement and to prevent the misuse of the Holdings Information. You will immediately notify FTI if you learn of any use of the Holdings Information by any employees, agents or clients that would otherwise violate this Agreement. You acknowledge that damages alone would not be an adequate remedy for any breach of the provisions of this Agreement and, accordingly, without prejudice to any and all other rights or remedies, you acknowledge that FTI or any Fund or F-T Fund to which the Holdings Information pertains shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of the provisions of this Agreement.
You shall not be bound by the provisions of confidentiality contained in this Agreement if such Holdings Information 1) is or becomes publicly known through no act or omission of the Financial Institution, its employees, agents or subcontractors; 2) is lawfully disclosed to you by a third party without restriction and without any obligation of confidentiality; 3) is required to be disclosed by any Governmental body, regulatory body (including without limitation any relevant securities exchange) or court of competent jurisdiction or otherwise pursuant to any statutory or regulatory obligation.
The Agreement shall remain in effect for so long as you access the Holdings Information from FTI. FT may terminate this Agreement immediately if this Agreement conflicts with any laws, rules or relevant regulatory interpretations. Upon termination, you shall continue to take reasonable measures to prevent the disclosure or dissemination of the Holdings Information. You acknowledge that the Holdings Information may be utilised for damaging purposes, such as duplicating FTI’s proprietary investment and trading strategies, techniques and methodologies. As a result, your nondisclosure obligations and the prohibition on your dissemination of the Holdings Information to any third party shall survive this Agreement’s termination. To the extent of any conflict between this Agreement and any other agreement between you and FTI, then this Agreement shall be deemed to constitute an amendment to such other agreement.
This Agreement may not be assigned by you, and you may not delegate its duties hereunder, without the prior written consent of FTI. All of the terms and provisions contained herein shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, successors and assigns. Nothing contained in this Agreement shall be construed as creating any obligation or any expectation on the part of either party to enter into a business relationship with the other party, or an obligation to refrain from entering into a business relationship with any third party.
Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between the parties, it being understood that the parties are independent contractors vis-à-vis one another. Except as specified herein, no party shall have the right, power or implied authority to create any obligation or duty, express or implied, on behalf of any other party hereto.
YOU SHALL INDEMNIFY AND HOLD ANY AND ALL FTI PERSONS HARMLESS AGAINST ANY AND ALL COSTS, EXPENSES, LOSSES, LIABILITIES, OBLIGATIONS, DAMAGES, PENALTIES TO WHICH ANY SUCH PARTY MAY BECOME SUBJECT INCLUDING REASONABLE LEGAL AND OTHER SUCH PROFESSIONAL FEES INCURRED IN INVESTIGATING AND DEFENDING OR APPEALING PENDING OR THREATENED CLAIMS, ACTIONS, SUITS, PROCEEDINGS, ARBITRATIONS, AMOUNTS PAID IN SETTLEMENT THEREOF (COLLECTIVELY “EXPENSES”) DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY BREACH OF THIS AGREEMENT SAVE WHERE SUCH EXPENSES RESULTED DIRECTLY FROM OUR GROSS NEGLIGENCE, FRAUD OR WILFUL MISCONDUCT.
The Agreement: (i) may be modified or supplemented by FTI at anytime upon reasonable notice to You; (ii) shall be binding upon and inure to the benefit of the successors and assigns of FTI and You; and (iii) shall be governed and construed in accordance with the laws of the United Kingdom.
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While big market swings can be unsettling to many investors, there are a number of alternative investment strategies that aim to turn volatility into opportunity, according to K2 Advisors’ Brooks Ritchey and Robert Christian. They outline some of the market challenges they see ahead, and why they believe certain hedge strategies could find fertile ground.
Brooks Ritchey Senior Managing Director, Head of Portfolio Construction, K2 Advisors
Robert Christian Senior Managing Director, Head of Research K2 Advisors
Today’s “risk uncertain” markets present an evolution of challenges for investors. The post-2008 massive expansion of central bank balance sheets around the developed world—one of the most dominant market-shaping forces over the last decade—is beginning to reverse. We see this in the United States and in other developed economies as well. Markets have seen increased volatility and threat of increased inflation. Earnings growth looks like it may be slowing somewhat. In addition, macroeconomic concerns—including geopolitical hot spots, growing political uncertainty in Europe and the threat of trade wars—all pose legitimate concerns for market stability.
In particular, the recent drawdowns in equity markets may be especially concerning. These declines are happening in the face of rising interest rates. Historically, if investors sought to manage equity volatility, they could do so by using core fixed income. Now, overweight in core fixed income carries its own risk, because of heightened sensitivity to rising rates.
Bottom line—investors have expressed concerns about what to do with their equity allocations, especially given current valuations and rising volatility. They are also concerned about fixed income allocations due to rising rates. These are risks they are seeking to mitigate. We will examine some hedge strategies to illustrate why increased allocations to alternatives may be a viable approach to addressing today’s uncertainties.
When are They in Favour?
Opportunity set is key to alternatives. What we mean is that when there are more possible trades or investments, there is more chance of capturing alpha. Looking back over the last 25 years, there have been six periods of rising interest rates. 1 We found that both the performance and standard deviation 2 of long/short hedge strategies have compared favourably with stocks and bonds, and long/short hedge strategies’ volatility was comparable to bonds and nearly half that of equities. 3 Additionally, we have found a significant amount of performance has come from a different source than equity beta. 4 In sum, we found the risk-and-return experience was better, and the ride a smoother one.
Why do we see a beneficial relationship with long/short hedge strategies, particularly in a rising interest-rate environment?
As central bank rates move higher, often we will see a wider variation of the specific interest rates that are applied to certain sectors, companies, or sovereign debt. For the vast majority of the past 10 years, as interest rates globally have been artificially suppressed, less economically sound companies or countries have been able to survive on a very low cost of financing. This was part of the central bankers’ intent as they sought to stabilise equity and bond markets.
This dynamic started to change in mid-December 2015 when the US Federal Reserve began hiking rates and, subsequently, other central banks like the Bank of Canada followed its lead. The result: a wider gap between companies that have a higher debt-to-equity ratio and, say, technology firms that have a lot of cash and don’t mind if rates rise.
As a result, we have seen a higher dispersion in the performance of winning sectors versus others, such as utilities and other high debt-to-equity industries. So, the separation of performance influenced by the impact of higher interest rates creates an alpha opportunity—alpha being defined as a measure a manager’s value added relative to a passive strategy, independent of the market movement.
In addition to the impact from rates on equity and fixed income, higher volatility in the major currency markets of the world also has an impact on sectors in terms of revenue growth, and whether they are importers or exporters.
Hedge Strategies with Widening Opportunity Sets
Currently, we have seen notable expanded opportunity sets for three hedge strategies: Global Macro, Event Driven and Relative Value. We provide our reasoning on the latter two categories.
Event Driven—Merger Arbitrage. We think it’s a ripe environment for mergers in the media industry, as well as a broadly more favourable outlook on vertical mergers. Tailwinds for corporate activity also persist, including corporate tax cuts, cash repatriation, high CEO confidence, and strong credit markets. We see the most significant headwind as the potential for a trade war between the United States and China. We also view technology as a significant factor influencing deal flow. In particular, changes in the semiconductor space, where companies seek to get ahead of the technology curve via acquisition of smaller start-ups versus developing innovation in-house, may drive activity.
So-called “industrial policy” is a potential headwind to future merger and acquisition (M&A) activity. This refers to the political considerations that are increasingly coming to the fore as business and commerce evolves globally. Governments around the world—in the interest of national security—have been increasingly sensitive to businesses sharing critical technologies. This is not just the United States and China, but includes Canada, Germany, Australia and the United Kingdom as well. Still, the added risk associated with industrial policy is not necessarily all bad for hedge fund strategies. The increased uncertainty may widen spreads significantly, creating a more attractive risk/reward opportunity set.
Relative Value—Fixed Income
With interest rates starting to rise we see duration 5 risk coming into focus for fixed income investors. We view relative value fixed income strategies, such as long/short credit, being well-positioned (given their shorter duration portfolios) to capture alpha form rising sector dispersion.
Since the Global Financial Crisis (GFC) a decade ago, gross-domestic product (GDP) growth in the United States has progressed at a steady, albeit unremarkable, rate of about 2%. But this growth is not uniform; there is tremendous variation if you deconstruct its components at the state level. Viewing the data from this perspective in the chart below, we see that only 16 US states have either met or exceeded the national average of GDP growth since the crisis. Four have had negative growth for the entirety of the recovery.
So, the US economy is not homogeneous, and in fact GDP growth is rather dispersed. Tax changes probably amplify this dispersion.
Our takeaway is that when hedge managers look at fixed income investments in the United States, they consider where those issuers do business. Not in terms of where they are headquartered, but where the underlying commerce takes place. The disparity in state growth rates may impact these companies very differently, which we believe ultimately can create opportunity for relative value fixed income hedge managers to capture alpha or seek different returns.
Finding a Smoother Road
There are three main allocations in portfolios: equity, fixed income and alternatives. How much and when to shift allocations is a key component of risk management. There is significant uncertainty going forward: Can global growth sustain? Will there be a de-coupling between the United States and the world? How will trade tensions between the United States and China resolve?
Whatever the results, in this type of evolving environment, we think understanding the types of investments that can act differently can potentially be a powerful tool to manage to your desired outcome.
We also believe that an increased allocation to alternatives may help buffer a portfolio for risks. Depending upon an investor’s objective, alternatives can potentially benefit from things like volatility, sector rotation, asset class dispersion, and de-coupled global growth. In the case of hedge strategies, their potential for a widening opportunity set helps signal when to expect them to be particularly useful.
Comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton has not independently verified, validated or audited such data. Franklin Templeton and its third party sources accept no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. K2 does not represent that such information is accurate or complete. Certain of the information contained in this document represents or is based upon forward-looking statements or information, including descriptions of anticipated market changes and expectations of future activity. K2 believes that such statements and information are based upon reasonable estimates and assumptions. However, forward-looking statements and information are inherently uncertain and actual events or results may differ from those projected. Therefore, too much reliance should not be placed on such forward-looking statements and information. Important data provider notices and terms available at www.franklintempletondatasources.com .
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Hedge funds are complex instruments and may not be suitable for all investors. Investment in these types of hedge-fund strategies is subject to those market risks common to entities investing in all types of securities, including market volatility. There can be no assurance that the investment strategies employed by hedge fund and liquid alternative managers will be successful. It is always possible that any trade could generate a loss if the manager’s expectations do not come to pass. Hedge strategy outlooks are determined relative to other hedge strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or sub-strategy. Conviction sentiment is determined by the K2 Advisors’ Research group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or sub-strategy and may change from time to time in the analyst’s sole discretion.
This information contains a general discussion of certain strategies pursued by underlying hedge strategy managers, which may be allocated across several K2 strategies. This discussion is not meant to represent a discussion of the overall performance of any K2 strategy. These materials reflect the analysis and opinions of K2 Advisors, and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments.
____________________________________
1. Rising rate environments are defined as a minimum 100 bps increase in at least one portion of the yield curve (2-Year, 5-Year, and 10-Year Treasury Constant Maturity Rates) lasting at least one year, over the last 25 years as of June 30, 2018. If peaks and troughs are on different dates, the date with two out of the three Treasury rates meeting that criteria is picked.
2. Standard deviation is considered a measure of volatility, representing deviation of a set of data from a mean.
3. Sources: Morningstar, Hedge Fund Research (HFR), Bloomberg. Based on HFRI Equity Hedge-Alpha calculated against the MCSI World Index. Alpha is a mathematical value indicating an investment’s excess return relative to a benchmark. Past performance is not indicative or a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Unlike most asset class indices, HFR Index returns reflect fees and expenses. See www.franklintempletondatasources.com for additional data provider information.
5. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years.
While big market swings can be unsettling to many investors, there are a number of alternative investment strategies that aim to turn volatility into opportunity, according to K2 Advisors’ Brooks Ritchey and Robert Christian. They outline some of the market challenges they see ahead, and why they believe certain hedge strategies could find fertile ground.
Brooks Ritchey
Senior Managing Director,
Head of Portfolio Construction,
K2 Advisors
Robert Christian
Senior Managing Director, Head of Research
K2 Advisors
Today’s “risk uncertain” markets present an evolution of challenges for investors. The post-2008 massive expansion of central bank balance sheets around the developed world—one of the most dominant market-shaping forces over the last decade—is beginning to reverse. We see this in the United States and in other developed economies as well. Markets have seen increased volatility and threat of increased inflation. Earnings growth looks like it may be slowing somewhat. In addition, macroeconomic concerns—including geopolitical hot spots, growing political uncertainty in Europe and the threat of trade wars—all pose legitimate concerns for market stability.
In particular, the recent drawdowns in equity markets may be especially concerning. These declines are happening in the face of rising interest rates. Historically, if investors sought to manage equity volatility, they could do so by using core fixed income. Now, overweight in core fixed income carries its own risk, because of heightened sensitivity to rising rates.
Bottom line—investors have expressed concerns about what to do with their equity allocations, especially given current valuations and rising volatility. They are also concerned about fixed income allocations due to rising rates. These are risks they are seeking to mitigate. We will examine some hedge strategies to illustrate why increased allocations to alternatives may be a viable approach to addressing today’s uncertainties.When are They in Favour?
Opportunity set is key to alternatives. What we mean is that when there are more possible trades or investments, there is more chance of capturing alpha. Looking back over the last 25 years, there have been six periods of rising interest rates. 1 We found that both the performance and standard deviation 2 of long/short hedge strategies have compared favourably with stocks and bonds, and long/short hedge strategies’ volatility was comparable to bonds and nearly half that of equities. 3 Additionally, we have found a significant amount of performance has come from a different source than equity beta. 4 In sum, we found the risk-and-return experience was better, and the ride a smoother one.
Why do we see a beneficial relationship with long/short hedge strategies, particularly in a rising interest-rate environment?
As central bank rates move higher, often we will see a wider variation of the specific interest rates that are applied to certain sectors, companies, or sovereign debt. For the vast majority of the past 10 years, as interest rates globally have been artificially suppressed, less economically sound companies or countries have been able to survive on a very low cost of financing. This was part of the central bankers’ intent as they sought to stabilise equity and bond markets.
This dynamic started to change in mid-December 2015 when the US Federal Reserve began hiking rates and, subsequently, other central banks like the Bank of Canada followed its lead. The result: a wider gap between companies that have a higher debt-to-equity ratio and, say, technology firms that have a lot of cash and don’t mind if rates rise.
As a result, we have seen a higher dispersion in the performance of winning sectors versus others, such as utilities and other high debt-to-equity industries. So, the separation of performance influenced by the impact of higher interest rates creates an alpha opportunity—alpha being defined as a measure a manager’s value added relative to a passive strategy, independent of the market movement.
In addition to the impact from rates on equity and fixed income, higher volatility in the major currency markets of the world also has an impact on sectors in terms of revenue growth, and whether they are importers or exporters.
Hedge Strategies with Widening Opportunity Sets
Currently, we have seen notable expanded opportunity sets for three hedge strategies: Global Macro, Event Driven and Relative Value. We provide our reasoning on the latter two categories.
Event Driven—Merger Arbitrage. We think it’s a ripe environment for mergers in the media industry, as well as a broadly more favourable outlook on vertical mergers. Tailwinds for corporate activity also persist, including corporate tax cuts, cash repatriation, high CEO confidence, and strong credit markets. We see the most significant headwind as the potential for a trade war between the United States and China. We also view technology as a significant factor influencing deal flow. In particular, changes in the semiconductor space, where companies seek to get ahead of the technology curve via acquisition of smaller start-ups versus developing innovation in-house, may drive activity.
So-called “industrial policy” is a potential headwind to future merger and acquisition (M&A) activity. This refers to the political considerations that are increasingly coming to the fore as business and commerce evolves globally. Governments around the world—in the interest of national security—have been increasingly sensitive to businesses sharing critical technologies. This is not just the United States and China, but includes Canada, Germany, Australia and the United Kingdom as well. Still, the added risk associated with industrial policy is not necessarily all bad for hedge fund strategies. The increased uncertainty may widen spreads significantly, creating a more attractive risk/reward opportunity set.
Relative Value—Fixed Income
With interest rates starting to rise we see duration 5 risk coming into focus for fixed income investors. We view relative value fixed income strategies, such as long/short credit, being well-positioned (given their shorter duration portfolios) to capture alpha form rising sector dispersion.
Since the Global Financial Crisis (GFC) a decade ago, gross-domestic product (GDP) growth in the United States has progressed at a steady, albeit unremarkable, rate of about 2%. But this growth is not uniform; there is tremendous variation if you deconstruct its components at the state level. Viewing the data from this perspective in the chart below, we see that only 16 US states have either met or exceeded the national average of GDP growth since the crisis. Four have had negative growth for the entirety of the recovery.
So, the US economy is not homogeneous, and in fact GDP growth is rather dispersed. Tax changes probably amplify this dispersion.
Our takeaway is that when hedge managers look at fixed income investments in the United States, they consider where those issuers do business. Not in terms of where they are headquartered, but where the underlying commerce takes place. The disparity in state growth rates may impact these companies very differently, which we believe ultimately can create opportunity for relative value fixed income hedge managers to capture alpha or seek different returns.
Finding a Smoother Road
There are three main allocations in portfolios: equity, fixed income and alternatives. How much and when to shift allocations is a key component of risk management. There is significant uncertainty going forward: Can global growth sustain? Will there be a de-coupling between the United States and the world? How will trade tensions between the United States and China resolve?
Whatever the results, in this type of evolving environment, we think understanding the types of investments that can act differently can potentially be a powerful tool to manage to your desired outcome.
We also believe that an increased allocation to alternatives may help buffer a portfolio for risks. Depending upon an investor’s objective, alternatives can potentially benefit from things like volatility, sector rotation, asset class dispersion, and de-coupled global growth. In the case of hedge strategies, their potential for a widening opportunity set helps signal when to expect them to be particularly useful.
Comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Hedge funds are complex instruments and may not be suitable for all investors. Investment in these types of hedge-fund strategies is subject to those market risks common to entities investing in all types of securities, including market volatility. There can be no assurance that the investment strategies employed by hedge fund and liquid alternative managers will be successful. It is always possible that any trade could generate a loss if the manager’s expectations do not come to pass. Hedge strategy outlooks are determined relative to other hedge strategies and do not represent an opinion regarding absolute expected future performance or risk of any strategy or sub-strategy. Conviction sentiment is determined by the K2 Advisors’ Research group based on a variety of factors deemed relevant to the analyst(s) covering the strategy or sub-strategy and may change from time to time in the analyst’s sole discretion.
This information contains a general discussion of certain strategies pursued by underlying hedge strategy managers, which may be allocated across several K2 strategies. This discussion is not meant to represent a discussion of the overall performance of any K2 strategy. These materials reflect the analysis and opinions of K2 Advisors, and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments.
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1. Rising rate environments are defined as a minimum 100 bps increase in at least one portion of the yield curve (2-Year, 5-Year, and 10-Year Treasury Constant Maturity Rates) lasting at least one year, over the last 25 years as of June 30, 2018. If peaks and troughs are on different dates, the date with two out of the three Treasury rates meeting that criteria is picked.
2. Standard deviation is considered a measure of volatility, representing deviation of a set of data from a mean.
3. Sources: Morningstar, Hedge Fund Research (HFR), Bloomberg. Based on HFRI Equity Hedge-Alpha calculated against the MCSI World Index. Alpha is a mathematical value indicating an investment’s excess return relative to a benchmark. Past performance is not indicative or a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Unlike most asset class indices, HFR Index returns reflect fees and expenses. See www.franklintempletondatasources.com for additional data provider information.
4. Source: HFRI.
5. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years.