A look into how alternative investment companies fared in the February market shake-up
The first half of February has seen the first significant increase in market volatility since 2016. Equity markets and other risky assets sold off sharply and in some instances declined by more than 10%.
We show that alternative investment companies have been able to protect investors from excessive losses during the recent market turbulence. Drawdowns in investment companies were typically two to five percentage points less than for comparable stocks.
One of the drivers of this stable performance is the lower liquidity of alternative investment companies. However, this is not the entire story, because price volatilities and trading volumes in investment companies increased to a similar extent in the February setback as they did for global stocks.
We show that there is some indication that one of the key drivers of the lower drawdowns in alternative investment companies is the lack of noise traders and algorithmic trading in these vehicles. Noise traders and algorithmic trading creates excess volatility in the short run and increased losses in times of heightened market uncertainty.
By investing in alternative investment companies, investors can avoid these short-term losses when it matters most and enjoy diversification benefits when other alternative investment vehicles such as sector-specific stocks, ETF, or open-ended funds have suffered from correlation breakdowns and excess volatility.
For the full report click here.
This communication contains written material that is generic in nature and not related to a specific financial instrument. It is not personalised to reflect the circumstances of an individual client and therefore does not amount to a personal recommendation to any person. It does not contain any substantive analysis and does not and is not intended to recommend or suggest any investment strategy or opinion as to the future value or price of financial instruments of any kind. This communication is also made openly available at the same time to any investment firms wishing to receive it or to the general public on this ("Fidante Partners") website www.fidante.com. Recipients of this communication based in the EEA who are subject to regulation under MiFID should note that while they must make their own determination Fidante Partners Europe Limited ("Fidante Partners") is of the view that this communication constitutes a “minor non-monetary benefit”.
Image: Vladislav T. Jirousek/Shutterstock.com