Given the recent swings on the stock market, nervous investors might want to consider a fund that dampens volatility. One such fund: the Goldman Sachs Absolute Return Tracker Fund Ticker:(GARTX).
Goldman Sachs portfolio strategist Theodore Enders is the first to admit that the fund — which is designed to track a broad universe of hedge funds — might not keep up with equities in a bull market.
“But in a bear market, it dampens volatility,” he said. “You want lower correlation to equities in a bear market.”
The fund has attracted more than $1 billion in assets since its May 2008 launch. And Mr. Enders suggested the fund might have been even more popular, if not for the powerful 2009 stock market rally.
“It has not been a very hot strategy, because it’s not volatile enough in investors’ minds,” he said. “Long-term, we’d never expect this strategy to outperform stocks in a bull market.”
What the strategy can do, however, is help manage risk inside a portfolio.
Consider, for example, the long-term volatility of stocks of between 15% and 17% (as measured by standard deviation) and a volatility of between 3% and 4% for investment-grade, fixed-income instruments.
By comparison, the broad hedge fund universe that the fund is tracking has a volatility of between 6% and 7%.
“There comes a point when you can’t take on more bond risk in a portfolio because you’re just adding interest rate risk,” Mr. Enders noted.
The fund is too new to have an actual volatility track record for the comparison, but the strategy was put to the test in May when the volatility of the S&P 500 doubled its long-term average to hover around 32%.
That compares to the fund’s 6.5% volatility in May.
The mutual fund mostly uses exchange-traded funds and futures contracts to mimic the performance of a universe of 2,000 hedge funds that are screened based on strategy, tenure and assets under management.
“We’ve identified 17 markets that are useful in replicating the performance of the hedge fund universe,” Mr. Tenders said.
From that starting point, the objective is to use broad market indexes to manage the exposure to the various markets.
The fund is currently allocated to five broad market categories through indexes that offer exposure to equities, fixed income, credit, commodities and volatility.
“We aim for the cheapest and most efficient way to gain exposure,” Mr. Enders said.
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