Outlook 2020: what are the benefits of non-directional strategies?

16 January 2020

In the final video of our Outlook 2020 series, our fund managers who run non-directional strategies highlight the benefits such an approach can bring.

Non-directional strategies are useful to the extent that investors may want diversification from traditional asset classes. Right now, equity markets are rich in valuation terms and have risen despite very weak earnings and weak economies. If a growth scare, earnings slowdown or even full-blown recession occurs, equity markets would certainly suffer. Traditionally, in these times, bond portfolios help as part of a traditional balanced portfolio, but nowadays, bond portfolios have significant negative carry and therefore may fail to provide the protection that investors would normally receive during an equity bear market. In this situation, long / short strategies which have the intention, ambition and track record to produce positive returns in negative markets will become very useful for investors.

We are entirely non-directional. In fact, we are acting in our investment portfolios as a diversifier and that, for us, is the main benefit of non-directional strategies. We are not dependant on bond or equity markets booming or going down; we are trying to capitalise across global risk premia that are non-directional in nature and provide investors with diversification benefits.

One of the issues with quantitative easing (QE) is that it has been directional strategies which have generally performed very strongly, supported by liquidity. However, when the tide goes out we see who is swimming naked and that is the environment in which to own non-directional strategies because of the diversification and lack of correlation. I believe investors should be looking at non-directional strategies, particularly in the current environment. In fairness, over the last few years some of those strategies have struggled due to a number of headwinds. However, I think those headwinds are now beginning to subside.

One of the benefits in recent years, despite what is going on geopolitically and in the marketplace, is the stability one would expect from an isolated asset class. In traditional markets, every headline and every news story seems to matter. Instead we are able to focus on what we are doing and that allows us to perform at what we hope is a high level. There are certain things that absolutely matter to us but they are not related necessarily to the broader markets.