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News Bulletin : ADA News Bulletin November 2010
32 NOVEMBER 2010 local governments. This is essentially the basis of global macro investing. In the current environment, the mood is constantly changing between recession fears and hopes of a continued economic recovery. Concerns about the high levels of sovereign debt coupled with high unemployment levels in Europe and the US make the sustainability of the current economic recovery unclear. It is against this backdrop that global macro fund managers who are nimble and unrestrained by a single market will be able to generate superior returns. Most Australian investors have significantly over-allocated their assets to local property investments and local shares with significant under-allocations to international investments. Whilst buying and holding shares, good quality companies and property for the long-term is a valid strategy, the GFC showed that factors beyond the control of investors or local governments can significantly affect the value of your investments. As an investor, you need to ask yourself the question "How can I further diversify my investments to reduce the risks of economic shocks that are beyond my control?" Investors need to consider adding investments that are not strongly correlated to their existing investments by investing in alternative strategies that can produce positive returns in both rising and falling markets and are non-correlated to traditional investment assets. These alternative strategies will increase the diversification of the portfolio resulting in lower overall risk which protects investors from having a purely directional bias in their portfolio. Although the Australian economy continues to do well and the AU$ is powering towards parity with the US$, a strong currency in turn creates new risks for investors. On the surface, all would appear to be rosy but the fact is Australia does not exist in a vacuum. A stronger currency has flow-on effects like reduced competitiveness for exporters and impacts inflation levels. So, while Australia does well, uncontrollable factors occurring outside Australia can prevent local investors from realizing the true value of their Australia-based investments. Smart investors are actively looking for investment opportunities that can counteract these risks and smooth out a portfolio's returns. Allocating a portion of your portfolio to alternative investments strategies helps to produce more consistent returns. WHAT CHARACTERISTICS SHOULD I LOOK FOR IN A GLOBAL MACRO FUND? The key factors investors should consider before investing in a global macro fund are: • Skilled management Managers of global macro funds should have proven investments skills across multiple assets classes and tend to back their investment judgement by investing their own capital alongside their investors. • Rigorous risk control systems Capital preservation is of paramount importance and fund managers need a rigorous risk management framework which allows for comprehensive risk controls that protect against downside risk. These risk controls usually incorporate comprehensive models that can stress test portfolios to ensure that the fund can withstand unexpected events that affect markets. • Liquidity As global macro funds often have fewer positions that are concentrated, it is important they use highly liquid investment instruments. During the GFC, many types of hedge funds were highly leveraged into illiquid investments. Investor funds were frozen and could not be redeemed in a timely manner. When investing in a global macro style fund it is important the fund provides investors with options for easy redemption of their investments. BENEFITS OF INVESTING IN A GLOBAL MACRO FUND According to the Dow Jones Credit Suisse Hedge Fund Index, global macro funds have been the top performers in the hedge fund sector so far this year. The benefits of investing in global macro hedge funds can be summarized as: • Global macro strategies have historically outperformed other hedge fund strategies; • Global macro strategies have historically have outperformed the broader equity market; • Global macro strategies have delivered the above performance with less volatility; and • Global macro strategies have delivered the above performance with a low correlation to traditional asset classes. Source: Dow Jones Credit Suisse Hedge Fund Indices In summary, I believe that global macro funds should be able to profit from strong emerging market currencies and commodity opportunities while staying nimble enough to adapt to changing market conditions. As John Templeton once said, "if you look around the world for investment bargains you will find more opportunities and better bargains than if you look in one place". Personally, I like the idea of increasing my diversification by investing in assets that can deliver positive returns regardless of what is happening in the share market. I plan to follow my own advice and invest a significant portion of my capital in alternative investment products like global macro funds. Michael Lannon is the Managing Director of 2020 DIRECTINVEST, an ADA Partner Service specialising in the provision of execution only DIY investment services.Contact: firstname.lastname@example.org or call 1800 352 021 Visit: www.2020directinvest.com.au This article has been prepared without taking account of your objectives, financial situation or needs; and because of that, you should consider the appropriateness of the advice, having regard to the client's objectives, financial situation and needs. investment insight "Personally, I like the idea of increasing my diversification by investing in assets that can deliver positive returns regardless of what is happening in the share market."
ADA News Bulletin October 2010
ADA News Bulletin December 2010