What are your prospects for your absolute return strategy?
In a context of macroeconomic uncertainty accentuated by inflationary pressures, geopolitical tensions, differences in budgetary policy and the implications of unconventional monetary policies, Investors are looking for ways to benefit from long-term exposure to equities without having to take on all the market risks. Market-neutral equity strategies are well positioned to address these challenges.
First, at its most basic level These long-short strategies try to beat the market in most situations by extracting alpha from the different relative evolutions of the securities. For Fidelity’s Absolute Return Global Equity (ARGE) strategy, leveraging high-conviction buy and sell recommendations from our own global research platform can provide alpha generation potential while minimizing general market exposures.
Secondly, also Uncertainty is expected to remain high, which translates into greater risks for investors with long-only exposures to stock indices. To address that, market-neutral equity strategies seek to reduce the volatility of portfolios to within a small percentage of comparable long-only equity indices. For example, the annualized volatility of Fidelity’s ARGE strategy was 5.4%, about a third of that recorded by the MSCI ACWI index in the four-year period ending September 30. Furthermore, market-neutral equity strategies could perform well in a volatile environment by benefiting from the high dispersion among stocks thanks to their long-short approach.
Third, The shift in the relationship between bonds and traditional stocks has undermined portfolio diversification assumptions. Historically, bonds have served as a hedge against equity risk, but this relationship has become unstable. Therefore, there may be a growing number of investors looking into other options, such as market-neutral equity strategies, which can circumvent this issue by focusing on security-specific factors rather than relying on broad market movements.
How are you positioning your fund in this context?
It is important to note that Market-neutral equity strategies are structured in such a way that they are not dependent on the direction of the markets. Unlike other active equity strategies, our goal is not to overweight one sector and underweight another based on market insight.
Our market-neutral equity strategy leverages our analysts’ buy and sell recommendations in a rigorous and consistent manner. When we set up our market-neutral fund, the long portfolio and the short portfolio mirror each other at the scale of countries, sectors, currencies and factors to mitigate these risks.
What remains are truly security-specific risks to deliver returns that are uncorrelated to other traditional asset classes, such as fixed income and equities, or our strategy indices, such as the HFR Equity Market Neutral Index.
That does not mean that events and sentiment in the markets do not negatively affect these strategies. Losses in value occur, especially at times when short-term market dynamics are not in line with the strategy, which focuses on long-term business fundamentals. In such an environment, the strategy could experience episodes of relative worse performance. However, in our view, downside risks have been relatively limited. The maximum loss in value of the ARGE fund is around 5.2% since its launch, which includes the market disruptions throughout the COVID-19 crisis.
To optimize investment results, investors should approach the risks of loss of value with a rigorous, long-term perspective. To achieve this, it is crucial to have a solid risk management framework. US equities, for example, accounted for around 67% of the MSCI ACWI index by market capitalization in November 2024, up from 57% just three years ago. Market concentration has increased, dominated by the group of stocks known as the Magnificent Seven: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
That suggests that investors’ long-only stock market portfolios measured by global equity indices have lost diversification. Risk is increasingly concentrated in fewer drivers of profitability and investors may be left on the wrong foot. For example, in the US, markets are pricing in expectations that the Republican administration’s pro-growth policies, such as deregulation, tax cuts and interest rate cuts, will boost US stocks. However, investors should also consider the possibility that these policies do not go as expected, are offset by other policies (such as tariffs), or do not occur at all.
As the dynamics of the macroeconomy, countries, sectors and other risks change, these will be captured in the vision of our analysts and will be integrated into the portfolio configuration process, which is supported by our preparation optimization tool. own. It does not matter what macroeconomic scenario is proposed; Our market-neutral equity strategy is positioned to benefit from security-specific risk vectors. At a time when competing macroeconomic and market forces are expected to result in increased volatility, our market-neutral equity strategy can provide an attractive and rigorous option for investors seeking more consistent results over time. of uncertainty.