In May of 2010 RAM Financial Group launched its Diversified Risk Parity Portfolio (DRP). The goal of DRP is to mitigate risk and protect against downside movements in the debt and equity markets. The risk model was adopted from over 10 years of research from a portfolio manager who has advised and designed strategies for the managers of the Harvard Endowment. This manager is now co-managing our DRP Portfolio in conjunction with RAM Financial Group CIO, Jason McGinty.
Below please find a recent message from our manager and monthly commentaries for DRP, which includes returns data, strategy and outlook. Please contact us, should you like to learn more about our strategy.
Daily Liquidity Monthly Performance (DRP)
Growth of $100 assuming no withdrawals or contributions since May 1, 2010*
August 31, 2011 message from our Manager:
"Hedge funds experienced their largest monthly declines since May 2010 in August as sovereign debt tensions in Europe and economic data suggesting a slowdown persisted. Most strategies were negative with the majority of our losses coming in the event driven, credit and relative value strategies. Our global macro allocation – which had taken on a more defensive posture since June – was a positive contributor with gains primarily coming from long fixed income and short equity positions.
DRP was –2.45% in August vs -2.72% for the HFRI Fond of Funds index and -5.43% for the S&P 500. While readers of our commentary have heard about our defensive positioning because of our fears of the realities of an economy that is in deleveraging mode and what we feel the reality of the Eurozone is, a month like August is even tough for us. Realized equity correlation on the S&P 100 hit 82%, which is higher than the 72% peak reached in 2008. And while we continue to have high conviction in many of our individual positions, the market extremes made for a difficult environment. With correlations this high, stocks essentially moved in tandem minimizing the potential for alpha production with the exception of the global macro trend following strategies.
Looking forward we are seeing an opportunity in the MBS arena, high yield is compelling again (although it may get more compelling in the short-run), and merger arbitrage spreads widened significantly which has opened our eyes to certain positions we follow in that space. Our risk exposure hasn’t been large throughout the beta run, but we believe our opportunity set to take risk will improve as the sovereign debt crisis in Europe will continue to weigh on the markets and general investor risk appetite until there is some credible resolution. While our slow and steady posture has been boring to watch over the massive beta run, we feel the market is facing the reality of a deleveraging global economy and our diversity is paying off during these turbulent times. Despite these trying times, we will continue to be patient, and continue to look for opportunities that meet our criteria. As always, please do not hesitate to call. (512) 327-6000"
July 31, 2011 message from our Manager:
"Given the political and economic turmoil experienced in July, we believe the Portfolio has performed fairly well on a relative basis. DRP was 0.31% vs 0.38% for the HFRI Fund of Funds Index and -2.03% for the S&P 500. Year to date DRP is 2.55% vs. 0.08% for the HFRI Fund of Funds Index. Given the extraordinary volatility of the last few months, we are proud of the way our risk management infrastructure has held up. As discussed in past commentary, we have been positioned for a risk-off move without being pre-positioned for an outright bear market (this is still not the most probable market outcome). Contributions came from our event driven positions and credit oriented positions as most categories of debt were positive for the month. This was due to a push for quality that occurred as the political process to raise the debt ceiling became increasingly stressful for the markets as the August 2 deadline to avoid default approached.
Our global macro category was also additive to performance in July. We expect to remain patient, and to continue evaluating dislocations going into the fall, which we expect may result in a variety of averaging down moves. Additionally, we may seek to add risk, as risk/reward ratios starts to look more attractive.
When reflecting on the correction of May/June 2010, we were intrigued by the similarities in issues we faced as investors then as we face now. We were concerned about domestic debt and the looming fiscal crisis in Europe. Here we are a year later and much of the cause of volatility relates to the same issues; U.S. debt issues, confusions among leadership and Sovereign debt issues in Europe. We are very comfortable with our positions which employ less directional strategies and will continue to seek opportunities of asymmetry. As always, please do not hesitate to call. (512) 327-6000"
June 30, 2011 message from our Manager:
"The equity market volatility index closed out June at 16.5 – a shockingly low number considering the S&P dropped 6% at mid- month. The European sovereign debt obligations weighed on all markets as commodities, bonds, and equities all ended the month lower. Our DRP Portfolio was -1.25% vs. the HFRI Fund of Hedge Funds Index being -1.36%. The relative outperformance came from our volatility cap and the global macro overlay we employ at the fund level.
The HFRI Fund of Hedge Fund Index suffered its largest loss since May 2010 and with negative contributions across all strategy areas. However, looking simply at the volatility index would truly understate the actual risk aversion that characterized markets for most of June. While performance in June was disappointing, due to the volatility cap we employ and the global macro overlay, we were able to achieve solid relative performance over our index and most of our less liquid competitors. We remained within our risk parameters and we continue to believe that the geopolitical and economic backdrop will continue to drive rich opportunity sets in the hedge fund asset class for the remainder of the year. As always, please do not hesitate to call with any questions. (512) 327-6000"
May 31, 2011 message from our Manager:
"Most hedge fund strategies produced negative returns in May with the bulk of losses coming from long/short equity and global trading. DRPIX was down 1.65% vs. -1.24% for the HFRI Hedge Fund of Funds Index and -1.13% for the S&P 500. Although global equity markets were -2% overall, when you look under the hood, the draw down in long/short equity strategies were caused more by idiosyncratic events rather than overall market movements. Consumer and technology related L/S equity investments were also negative for the month. The lone bright spot in equity investing was in the healthcare sector. Global macro strategies faced challenging conditions as well, as most managers were positioned long commodities, short the dollar and modestly long equities early in the month. While these trades have been profitable over the past several months, their positioning was costly in May. As for our allocation, we feel the relative underperformance is temporary and feel our active macro theme based allocation strategy will prove to be rewarding.
Currently we have over-weights to MBS, event driven strategies and late stage distressed strategies. We also have a slight overweight to merger arbitrage strategies. The MBS allocation served as a diversifier and our event driven exposures served as a buffer to the negative volatility of the index. We feel the opportunity set and diversification benefits from our overweight’s are still in place and will continue to remain with our current allocation. The performance of our strategy compares favorably to the relevant indices and several peers based on the active approach to asset allocation we take. As always, please do not hesitate to call with any questions. (512) 327-6000"
April 30, 2011 message from our Manager:
"While April financial statements may make investors feel good, the reality is that the month of April has only created more confusion in the capital markets because we are seeing very strange signals from multiple asset classes that are difficult to discern. Many old correlations are breaking down and the line between the reflation trade and the deflation trade has become blurred. For DRP, we are pleased to report a +2.64% month. However, as we reported at the end of March that we caught up on some of the returns we felt Q4 2010 took from us, April represents a month that makes us feel like we were paid in advance and could see enhanced volatility looking forward. The HFRI Fund of Hedge Funds registered a +1.46% and the S&P was + 2.96%.
Across the portfolio stocks, bonds and commodities provided positive attribution to the portfolio. Even our short book outperformed it’s inverse index. The story being told by these different asset classes is where things get confusing. Bonds and commodities seem to be saying that the world economy is lacking growth momentum and may even face a bout of deflation. Stocks, on the other hand, disagree. The U.S. market is saying growth is fine and profits will keep expanding. Unfortunately there is no scientific way to answer this question and any interpretation inevitably involves a high degree of subjectivity. For our part, we are pleased that DRP has the flexibility to have both long and short positions… To seek “relative value” in our trade set-ups.
For our part, the way we will approach these challenging markets can be summarized as the following: As you know, we are overweight relative value RMBS and CMBS, long event driven opportunities and within the event space have a specific sub-allocation to merger arbitrage opportunities. We are also long U.S. and emerging markets vs. the European countries as we feel Europe presents more risk than we are comfortable with now. As we sit to write this, Greece is renegotiating its bail-out on the one year anniversary of their debt restructuring and austerity program. Europe embraced austerity earlier than most and it seems that growth is beginning to suffer. Also we are long some post re-org equities. As always, please do not hesitate to call with any questions. (512) 327-6000."
March 31, 2011 message from our Manager:
"While U.S. equity markets were largely unchanged in March, we doubt March of 2011 will go down as an uneventful month. March was volatile on many fronts with significant events around the globe. We had the tragic earthquake and tsunami in Japan, further tensions in the middle east and continued European sovereign bank concerns. Most international stock markets finished the month lower–most notably– Japan. While the turmoil proved challenging, the hedge fund averages finished slightly lower with the HFRI Fund of Hedge Fund index finishing -0.13%. DRP closed the month on a positive note finishing +0.32% and 2.45% for the quarter. The S&P 500 closed the month +0.04% but saw a short-lived correction of roughly 5% intra-month.
While the fourth quarter of 2010 was challenging for a strategy that seeks risk factor neutrality, the first quarter of 2011 was ideal. DRP saw low volatility and came in at the upper range of our quarterly return target. DRP generated gains at each risk factor. Some of the stronger performance came from our “special situations” and event driven strategies where strong deal flow helped to provide a strong bid for companies in that segment of the economic cycle. Credit and fixed income strategies also performed well as the high yield trade continued to play out. And while we feel we have squeezed all the returns out of high yield within our risk budget, we feel we will continue to find fixed income that will be misunderstood and trading at a discount to fair value.
Equity market neutral managers benefitted from increased market volatility and reasonable levels of stock dispersion. Our commodities and metals book also contributed to performance as gold, silver and the miners had a strong showing in March. Looking forward, it seems the equitybull market remains intact, but it may have entered a new phase with different attributes. In short, we see the speed of price appreciation slowing, with more frequent interruptions or corrections as a result of shits in macroeconomic, financial and monetary conditions. We are overweight U.S. and emerging markets as we feel our European relative value trade has played out and presents more risk than we are comfortable with now. As always, please do not hesitate to call with any questions (512) 327-6000."
February 28th, 2011 message from our Manager:
"They say that it is an uncomfortable state of mind when holding conflicting ideas at the same time. We have learned to appreciate and thrive in this state when it comes to investing as we would be hard pressed to remember a time when we weren’t in a constant state of cognitive dissonance. At the moment, we are heartened by the positive trend in the hedge fund asset class as all major strategies experienced gains, we feel the global economy may well be in the early stages of what could be a multi-year growth cycle complimented by healing balance sheets and greater confidence in developed economies. Yet we continue to remain concerned about negative macro-economic forces endangering the post-crises global economic recovery. We are particularly focused on stressed European peripheral sovereign balance sheets, the potential drag on economic activity as a result of central banks exiting quantitative easing programs and sharply reduced fiscal stimulus, and commodity and food driven inflation in emerging markets.
Also, one could look at our monthly return streams as an example; monthly return streams are fungible and the last two months are good examples of that. We have had a long standing view that gold is highly correlated to sovereign balance sheet expansion (and/or contraction), and while that position has been a positive contributor to performance, it was a detractor in January. However, in February the metals complex in DRP staged a strong reversal as investors fled to safe haven assets. So while our theme is still very much in place and we are pleased with that position, we had to defend that position in January. We did so by using the weakness to add to the trade.
DRP was + 2.36% in February compared to 0.64% for the HFRI Fund of Funds Index. The out-performance was driven by strong performance in global trading with long positions in energy and commodities. Our hedged equity strategies performed well with a low beta profile as alpha generation continued to benefit from lower levels of stock correlation. As always, please do not hesitate to call with any questions. (512) 327-6000."
Daily Liquidity Monthly Commentary (DRP)
|July 31, 2011
|February 28, 2011||August 31, 2011
|March 31, 2011
|April 30, 2011
|May 31, 2011
|June 30, 2011