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CONTRIBUTORS

Gordon Nicholson, CFA, CAIA, ESQ.

Senior Vice President, Portfolio Manager

Executive summary

  • In recent years, many institutions have positioned their asset allocations more aggressively to seek higher returns. In the process, many have added more equity-like beta risk, potentially making portfolios more vulnerable to drawdowns.
  • At the same time, the classic negative stock-bond correlation relationship that persisted for the past 20 years is under pressure and we appear to be entering a new regime of higher risk.
  • Assumptions on how to best reduce risk in portfolios need to be revisited. We believe hedge funds are foundational to building a multi-layered risk mitigation strategy that can potentially deliver diversification dynamically across many different market environments.
  • When evaluating a risk mitigation strategy, focusing on outcomes is key. As a global hedge fund advisor for nearly three decades, we believe a solution should exhibit positive carry with efficient use of risk, positive return asymmetry, an alpha-driven return stream and low sensitivity to market shocks.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss or principal. Investments in alternative investment strategies and hedge funds (collectively, “Alternative Investments”) are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Financial derivative instruments are often used in alternative investment strategies and involve costs and can create economic leverage in the fund's portfolio which may result in significant volatility and cause the fund to participate in losses (as well as gains) in an amount that significantly exceeds the fund's initial investment. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. There can be no assurance that the investment strategies employed by FTIS or the managers of the investment entities selected by FTIS will be successful.

The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from alternative investments may not adequately compensate investors for the business and financial risks assumed. An investment in alternative investments is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by alternative investments, such as leverage and hedging, may increase the adverse impact to which an investment portfolio may be subject.

Depending on the structure of the product invested, alternative investments may not be required to provide investors with periodic pricing or valuation and there may be a lack of transparency as to the underlying assets. Investing in alternative investments may also involve tax consequences and a prospective investor should consult with a tax advisor before investing. In addition to direct asset based fees and expenses, certain alternative investments such as funds of hedge funds incur additional indirect fees, expenses and asset-based compensation of investment funds in which these alternative investments invest.

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The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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