Investing without some kind of hedge in the current market environment is far too risky, according to Rick Lake, co-chairman and portfolio manager at Lake Partners Inc., a firm with $3.5 billion under advisement in alternative strategies.
“Right now, long only is wrong only,” he said. “The world is moving steadily but fitfully toward growth and economic recovery, but it’s important to stay hedged because we’re still looking at a massive overhang of debt.”
Mr. Lake advises institutions and individual investors on allocations to alternative investments, and also manages a mutual fund using a similar strategy.
The Aston/Lake Partners LASSO Alternatives Fund Ticker:(ALSOX) invests in registered products to bring alternative investing strategies to the mutual fund space. The fund, launched in April 2009, primarily invests in other mutual funds, but also allocates assets to exchange-traded notes, exchange-traded funds and closed-end funds.
“Our mandate for the mutual fund is that every investment is registered and liquid,” Mr. Lake said.
The general strategy, which encompasses a range of alternative strategies to hedge risk and leverage opportunities, is aimed at generating non-correlated performance. In the current market environment, he said, volatility has created new opportunities to invest in risk assets “because they’ve gotten so cheap.”
In order to qualify for the mutual fund portfolio, a fund must meet at least one of the following criteria: It has to use short-selling, use hedging instruments such as options, or it has to employ a specific alternative strategy such as leverage. While there are all kinds of mutual funds that claim various hedging strategies and adopt names that imply the use of alternative strategies, Mr. Lake said there are only about 500 that make the cut and can actually make that claim.
Part of the risk-management process involves keeping daily volatility of the underlying investments to 1% plus or minus. Mr. Lake also seeks to limit monthly declines by the underlying funds to 4%.
“If we get to where something is down 3%, we need to reduce our exposure to it,” he said. “Risk management is the key aspect in the current environment.”
The fund is currently about 25% net long with an emphasis in three broad alternative areas.
For exposure to long-short credit and strategic fixed income, one of the funds Mr. Lake uses is Eaton Vance Global Macro Absolute Return Ticker:(EAGMX), which is a fund that has been shorting Greece for the past five years.
A solid long-short equity fund is important because “2010 is the year of discriminating returns,” Mr. Lake said. In this category, he turns to the Weitz Partners III Partners Fund Ticker:(WPOPX).
The third main area of focus for the fund is arbitrage, for which Mr. Lake uses the Merger Fund Ticker:(MERFX).
“You have to diversify because alternative strategies are idiosyncratic,” he said. “Each strategy has its own period of opportunity or risk.”
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