Tug of War

Content provided by Grant Engelbart, CLS Portfolio Manager

The world of alternative investments is vast, and often times a little blurry.  A good place to start when thinking about alternatives is a fairly simple idea – buy stocks you like, sell stocks you don’t.  This is the general premise for a long/short strategy.  Since, in many cases the only assets you need for a long/short strategy are individual stocks; they fit nicely into the category of “liquid” alternative, and can be implemented fairly easily inside of an ETF.  A few examples:

Market/Beta Neutral

The basic idea here is to buy a specific amount of stocks, and sell an equal amount short, to effectively create “zero” market exposure, or zero beta.  Returns are earned by buying better stocks than you sell short

130/30 or Short Extension

Instead of targeting a zero market position or zero beta, this strategy targets a beta of 1.  For instance, you buy an index with 100 stocks, and sell short 30 of them that you don’t like.  With the proceeds from the short sell, you add the money to 30 stocks you do like.  Your net position then becomes equal to the market.

Long/Short – Long Bias

A very similar idea to the market neutral strategy, except instead of a zero market position/beta, the fund tends to have a position that tilts towards the long side.  Maybe 20%, 40%, or 60% market exposure.  Sound familiar?  Enhanced income is a long/short fund with a long bias!

Why use long/short funds?  These funds/strategies are generally great additions to a balanced portfolio as they are less correlated and less volatile than traditional equities.  Market Neutral funds are absolute returns strategies that seek to generate returns in any market environment.  This strategy is used across many CLS strategies, especially in our active strategies.

 

 

 

 

 

 

Alternative investing refers to the practice of investing in non-traditional asset classes such as managed futures, real estate, commodities, derivatives, etc.  Diversifiable risks will heavily depend on the specific investment and may include, but are not limited to, business risk, liquidity risk, and capital risk.
CLS active strategies are tactical asset allocation strategies designed to overweight a particular asset class.  Since these strategies do not maintain a consistent risk level over time and can quickly become more aggressive or more conservative, these strategies are designed to be a part of, or supplement to, and not a substitute for, an overall well-diversified investment portfolio.
1161-CLS-6/6/2014