Market Keeping You up at Night? Look for the Right Hedge

Market Keeping You up at Night? Look for the Right Hedge

Like so many others in the industry, I was wrong.

For years, I was certain that the bull market was nearing its end. I thought the market was over-extended, and that, surely, the wild equities run was coming to an end. But everyone else was bullish, and perhaps rightfully so. And while I’ve watched equities continue on their spectacular rise, I do think now is the time (really!) to put a hedge in place. Here’s why. Here’s how.

Why hedge now?


The bull market has been great. I get it. It’s been the perfect antidote to the Great Recession, and there’s not an investor out there who wouldn’t love to see it go on forever. But the fact is that no one knows when it’s going to turn. And mark my words: it will turn! What will cause that shift is anyone’s guess, but my sense is that it won’t take much to scare people and push them to start selling. The market has been buoyed up ever since the November election. Expectations of what the new administration could accomplish included policy changes that would affect corporate expenses and revenues, as well as taxation changes that would have a positive impact on earnings. Now, four months in, it’s clear that many of those changes won’t be as easy as hoped. And while all of that remains conjecture, there’s no doubt that interest rates are on a slow and steady path up—a shift that has a very real impact on your client portfolios and how they need to be managed moving forward.

Investing 101 makes one thing quite clear: you make more by losing less. That’s why institutions are consistently heavy in diversification—in every type of market environment, including even the most bullish of bull markets. The reason: recovering from losses after a drawdown is extremely difficult. Any investor who lived through 2008 knows this all too well. And yet hedging has been a tough proposition in today’s market when the average value of the hedge—about 3-6%—has been completely washed out by an equal 3-6% of volatility. The good news is that, with interest rates rising, the scales are tipping. And with a typical hedge, volatility typically remains steady, while the rate of return is likely to nearly double. Suddenly hedging your portfolio is starting to look much more attractive after all.

So yes, if suitable, we believe it’s time to hedge. But how? What’s the best approach in today’s market, especially when it is possible that equities may continue to climb? How can you position your portfolios to seek continued growth while also seeking to protect them from any potential future downturn?  Not all hedges are the same. That’s why the best place is start is to ask yourself one question: “What portion of your portfolio is keeping me up at night?

Rising interest rates


For many advisors, the answer is rising interest rates. Rising rates mean that fixed income is no longer on an upward trend. As a result, you need may need to find some vehicle to replace it that seeks to deliver the same type of volatility dampening, while also potentially providing competitive returns. Depending on your client’s investment goals, one way to achieve this is to use an ETF that has a volatility profile similar to aggregate bonds, and that attempts to replicate the risk-adjusted returns of hedge funds using various hedge fund investment styles.

An equities drawdown


If your biggest concern is the inevitable drawdown in equities, we believe the answer is certainly not to exit the equities market altogether, but rather to hedge using a strategy such as M&A (merger arbitrage). M&A has been used to hedge volatile equity markets for decades, largely because M&A returns are typically uncorrelated with equities. The approach seeks to deliver only one-third of the volatility while still capturing the upside of equities returns. That lack of correlation may be just the ticket when equities reach the end of their run.

Other alternatives


Other options include leveraging other alternatives to increase portfolio diversification. In the past three to six months, commodities have finally begun to look favorable again, and many analysts expect them to continue moving forward. And while, unlike in the equities space, there’s lots of room to run, diversification is key. After all, it’s never wise to put all your eggs in one basket. If suitable, one may consider investing in a well diversified, equity linked commodities ETF.  

While often overlooked in a rising-rate environment, REITS may also help capture yield. As you might expect, that’s typically not the case for large cap REITS which, because they are highly correlated with the market, offer little as a diversification tool. Small cap REITS, however, are a different story. These “hidden gems” offer a yield that can be 50-75% higher. Plus, because fund flows are much less robust than they are for large cap REITS, small caps offer similar levels of low volatility—but with much greater opportunity for capital appreciation.

It’s time for a good night’s sleep


Now that the optimism about the new presidential administration has waned, many investors are much more willing to accept the fact that it may finally be time to begin to hedge their portfolios and put a plan in place to protect against a drawdown. It’s true that I may be wrong once again, but it will certainly be easier to have that conversation with your clients now—before the shift takes place—than it will be after the fact. Choose a hedging strategy that tackles your biggest concerns, and your clients will thank you in end. Even better: you’re bound to get a much better night’s sleep knowing you’ve set the stage for a smoother, safer path forward. 

 Click here to learn more about IndexIQ.

 IndexIQ® is the indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC. Adam Patti is a registered representative of NYLIFE Distributors LLC. 

Adam Patti
Building Smarter Portfolios
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Adam is Chief Executive Officer and Founder of IndexIQ. Prior to founding IndexIQ, he led Fortune Indexes, a pioneer in the Exchange-Traded Fund (ETF) industry, having launche ... Click for full bio

Rosie the Robot, Amazon, and the Future of RAAI

Rosie the Robot, Amazon, and the Future of RAAI

Written by: Travis Briggs, CEO at ROBO Global US

It’s tough to find a kid out there who hasn’t dreamed about robots. Long before artificial intelligence existed in the real world, the idea of a non-human entity that could act and think like a human has been rooted in our imaginations. According to Greek legends, Cadmus turned dragon teeth into soldiers, Hephaestus fabricated tables that could “walk” on their own three legs, and Talos, perhaps the original “Tin Man,” defended Crete. Of course, in our own times, modern storytellers have added hundreds of new examples to the mix. Many of us grew up watching Rosie the Robot on The Jetsons. As we got older, the stories got more sophisticated. “Hal” in 2001: A Space Odyssey was soon followed by R2-D2 and C-3PO in the original Star Wars trilogy. RoboCop, Interstellar, and Ex Machina are just a few of the recent additions to the list.

Maybe it’s because these stories are such a part of our culture that few people realize just how far robotics has advanced today—and that artificial intelligence is anything but a futuristic fantasy. Ask anyone outside the industry how modern-day robots and artificial intelligence (AI) are used in the real world, and the answers are usually pretty generic. Surgical robots. Self-driving cars. Amazon’s Alexa. What remains a mystery to most is the immense and fast-growing role the combination of robotics automation and artificial intelligence, or RAAI (pronounced “ray”), plays in nearly every aspect of our everyday lives.

Today, shopping online is something most of us take for granted, and yet eCommerce is still in its relative infancy. Despite double-digit growth in the past four years, only 8% of total retail spending is currently done online. That number is growing every day. Business headlines in July announced that Amazon was on a hiring spree to add another 50K fulfillment employees to its already massive workforce. While that certainly reflects the shift from brick-and-mortar to web-based retail, it doesn’t even begin to tell the story of what this growth means for the technology and application firms that deliver the RAAI tools required to support the momentum of eCommerce. In 2017, only 5% of the warehouses that fuel eCommerce are even partially automated. This means that to keep up with demand, the application of RAAI will have to accelerate—and fast. In fact, RAAI is a key driver of success for top e-retailers like Amazon, Apple, and Wal-Mart as they strive to meet the explosion in online sales.

From an investor’s perspective, this fast-growing demand for robotics, automation and artificial intelligence is a promising opportunity—especially in logistics automation that includes the tools and technologies that drive efficiencies across complex retail supply chains. Considering the fact that four of the top ten supply chain automation players were acquired in the past three years, it’s clear that the industry is transforming rapidly. Amazon’s introduction of Prime delivery (which itself requires incredibly sophisticated logistics operations) was only made possible by its 2012 acquisition of Kiva Systems, the pioneer of autonomous mobile robots for warehouses and supply chains. Amazon recently upped the ante yet again with its recent acquisition of Whole Foods Market, which not only adds 450 warehouses to its immense logistics network, but is also expected to be a game-changer for the online grocery retail industry.

Clearly Amazon isn’t the only major driver of innovation in logistics automation. It’s just the largest, at least for the moment. It’s no wonder that many RAAI companies have outperformed the S&P500 in the past three years. And while some investors have worried that the RAAI movement is at risk of creating its own tech bubble, the growth of eCommerce is showing no signs of reaching a peak. In fact, if the online retail industry comes even close to achieving the growth predicted—of doubling to an amazing $4 trillion by 2020—it’s likely that logistics automation is still in the early stages of adoption. For best-of-breed players in every area of logistics automation, from equipment, software, and services to supply chain automation technology providers, the potential for growth is tremendous.

How can investors take advantage of the growth in robotics, automation, and artificial intelligence?


One simple way to track the performance of these markets is through the ROBO Global Robotics & Automation Index. The logistics subsector currently accounts for around 9% of the index and is the best performing subsector since its inception. The index includes leading players in every area of RAAI, including material handling systems, automated storage and retrieval systems, enterprise asset intelligence, and supply chain management software across a wide range of geographies and market capitalizations. Our index is research based and we apply quality filters to identify the best high growth companies that enable this infrastructure and technology that is driving the revolution in the retail and distribution world.

When I was a kid, I may have dreamed of having a Rosie the Robot of my own to help do my chores, but I certainly had no idea how her 21st century successors would revolutionize how we shop, where we shop, and even how we receive what we buy - often via delivery to our doorstep on the very same day. Of course, the use of RAAI is by no means limited to eCommerce. It’s driving transformative change in nearly every industry. But when it comes to enabling the logistics automation required to support a level of growth rarely seen in any industry, RAAI has a lot of legs to stand on—even if those “legs” are anything but human.

To learn more, download A Look Into Logistics Automation, our July 2017 whitepaper on the evolution and opportunity of logistics automation.


The ROBO Global® Robotics and Automation Index and the ROBO Global® Robotics and Automation UCITS Index (the “Indices”) are the property of ROBO who have contracted with Solactive AG to calculate and maintain the Indices. Past performance of an index is not a guarantee of future results. It is not intended that anything stated above should be construed as an offer or invitation to buy or sell any investment in any Investment Fund or other investment vehicle referred to in this website, or for potential investors to engage in any investment activity.
ROBO Global
Robotics and AI
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ROBO Global LLC is the creator of the ROBO Global® Robotics and Automation Index series, which provides comprehensive, transparent and diversified benchmarks representing the ... Click for full bio