Nothing makes investors and markets more nervous and unsettled than uncertainty.
Fuelled by the ongoing Brexit saga, the trade war between China and the US and the global slowdown, markets are moving up and down faster than a yo-yo.
In times of such extreme volatility, however, is there a case for advisers and their clients to consider using shorting strategies within an investment portfolio?
“The more progressive advice firms, which place a real focus on wealth management, are certainly becoming more open to strategies that can provide added value to clients,” highlights Victoria Hicks, director at City & Capital Acquisitions.
“However, it is important for advisers to continue to adapt and research different investment strategies in order to ensure those recommended are appropriate for their customers’ objectives, risk profile and capacity for loss.”
Traditionally, long-short strategies were reserved for hedge funds and for a long time were considered inaccessible to retail investors.
However, boosted by investor demand for market-suitable products, the number of traditional asset and fund managers adopting such strategies has increased significantly.
MontLake chief executive, Cyril Delamare, explains: “Alternative investments have made their way into European regulated fund structures, namely UCITS.
“You have a number of UCITS funds which have alternative hedge fund strategies that provide short exposure to stocks and bonds in their portfolios, so there are a number of offerings that advisers can choose from.
“The reason why they’re choosing to increase their exposure to these types of strategies is that everybody agrees that we are getting towards the top of the market, towards the end of a cycle.
“Alternative strategies tend to perform well in protecting portfolios and work well on the downside when you are at those inflection points, with a potential slowdown of the economy or an increase in potential market volatility.”
With freedom, however, comes responsibility and this is certainly the case when it comes to shorting the market.
The aim of such strategies is to take advantage of profits that can be made by short selling a stock and benefiting from a decline in a company’s share price.
In contrast, a long strategy – or conventional method of investing – would purchase shares that are expected to increase in value over time, at which point a profit can be made.
“When a fund includes short strategy, this does pose the potential for significant losses,” Ms Hicks says.
“It is therefore important to not only assess the client’s investment priorities, but also their risk profile and ability to withstand fluctuations, without impacting upon their standard of living.”
Not all long/short funds are the same
She adds that it is important to not assume that all long/short strategy funds are the same.