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Ampersand Portfolio Solutions

Augmenting liquid alternatives allocations

PROFILE

Ampersand Portfolio Solutions’ proposition could prove to be a disruptive business model – in terms of asset allocation, portfolio financing and fee structures – for investors who share Ampersand’s perspectives on these questions.

The term ‘alternative’ investments may imply that they are substitutes for conventional asset classes, but the Ampersand team is of the opinion that alternatives can and should instead be seen as complements – when structured in the right way. Ampersand is the recently launched bespoke portfolio solutions division of Equinox Funds.

“The only free lunch is diversification, but most portfolios are not diversified enough to get its benefits. Inadequate diversification with some investors only having 5% in alternatives leads to too much risk, and in particular, too much equity risk,” says Ampersand CIO, Dr Ajay Dravid.

Ampersand has contributed a series of articles on ‘The Risk Contribution of Stocks’ to The Hedge Fund Journal, setting out how equities have experienced drawdowns as high as 50% and account for over 90% of volatility risk in typical 60% equities/40% bonds portfolios, based on data going back to 1975. Having 40% in bonds only marginally reduces volatility risk on this historical lookback and might not help when equity sell-offs are driven by rising interest rates, such as in February 2018, or the 2013 taper tantrum.

“This volatility of insufficiently diversified portfolios lets greed and fear run portfolios, as investors stay invested for too long – or sell at the bottom and do not get back in,” observes Dravid. Indeed, there is much evidence to suggest that most investors are not adept at market timing, since money-weighted returns on most funds fall far short of time-weighted returns, because investors tend to buy high and sell low. Professional investors may fall prey to the same behavioural biases as retail investors – witness the influx of assets into CTAs in 2009, which would have been more usefully allocated the year before. Ampersand are not market timers. “There is an old proverb that the best time to plant a tree was 20 years ago. The benefits of extended diversification should hold true over time, and a well-diversified portfolio should hold up best in terms of risk-adjusted returns,” argues Dravid.

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