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Market volatility is back, and advisors are fielding more questions on how to protect their portfolios. For those with stocks south of the border, the solutions may include strategies to hedge the U.S. equity market.
Globe Advisor spoke recently with Bill DeRoche, chief Investment officer at AGF Investments LLC and head of AGFiQ Alternative Strategies in Boston, about ways to lower portfolio volatility and reduce the impact of drawdowns. Mr. DeRoche is also a manager of AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF QBTL-T, designed for investors who are looking for a strategic or tactical hedge for equity portfolios.
How would you characterize what we’re seeing in the market today?
It’s a little bit different than your traditional equity drawdown event. Typically, the concern is we’re heading toward a recession and interest rates and inflation are falling. That doesn’t appear to be on the horizon. We’re looking at inflation expectations peaking in the coming months and interest rates rising. We think that long-duration assets could get hit – both fixed income as well as equities. We’re seeing some of that already with some high-beta equities coming down significantly since November.
What are you suggesting clients do in this type of market?
We’re suggesting to a lot of our clients that maybe they reconsider or adjust some of the “insurance” they have in their portfolios to mitigate some of the potential equity drawdowns. We do have a strategy that’s long low-beta securities, and short high-beta securities, which is AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF.
How does it work?
We have 200 equally weighted positions in the long portfolio and 200 equally weighted positions in the short portfolio. These are names in the Russell 1000 Index. The strategy rebalances quarterly. We’re ranking on beta, but it’s done within sectors, so we’re not going to have a huge sector bet in the portfolio. As of Jan. 28, the ETF also changed to an active, rules-based strategy from a passive index-tracking strategy.
How should advisors explain this to interested clients?
It’s definitely a different type of investment in that it’s a tool to be used in the portfolio. It’s an “insurance” product that’s designed to zig when the market zags. You want to combine it with core equities.
For example, if you’re looking to recreate the return and risk profile of a 60-40 equity fixed income portfolio, you’re looking in the neighbourhood of 75 per cent core equity and 25 per cent in this strategy. Over the past 15 years, you would’ve ended up with something on the return front [as the 60-40 portfolio] with just a little less risk.
We think there’s a place for this in a portfolio at all times. In a risk-on environment, you’d be looking to reduce the position, but as you get into a more risk-off environment, this would be an asset that you’d be looking to add to reduce some of your allocations to long-duration fixed income.
This interview has been edited and condensed.
– Brenda Bouw, special to The Globe and Mail
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