It is likely that few investors will be sad 2022 is over. It was a dismal year for most with very few places to hide: global equities finished the year down over 18% while global fixed income was off over 16%, the sector’s poorest showing in decades. It certainly was a tough year for the 60/40 portfolio, off almost 16% as fixed income no longer provided risk mitigation for equities. These losses were mostly fueled by inflation pressures that prompted the Fed to raise rates by over 4%, its most aggressive hiking cycle in decades. The War in Ukraine as well as the COVID lockdown hangover only added fuel to the fire of burning portfolios.
What comes next is unclear as the Fed seeks to enforce its dual mandate. While inflation seems to have peaked, it remains elevated. On the other side, the inversion of the yield curve is signaling a recession which is now widely anticipated by market participants while perhaps not being fully priced in the markets.
For 2023, four broad scenarios look probable:
The "soft-landing" which the Fed is looking to engineer;
A "hard landing" which would quickly bring a recession;
"Stagflation" where inflation is persistent and causes the Fed to keep rates elevated at the cost of economic growth;
The Fed tolerates higher inflation for a while so as to not sacrifice growth and full employment.
These four scenarios could have some very different implication for risk-assets, so what should investors do now?
The short answer is to stay the course - at least for investors that have a diversified portfolio.
For investors that already have a well-diversified portfolio that includes alternatives, including these alternatives that did well in 2022, should continue on the same path, possibly rebalancing their portfolio to take advantage of the appreciation of these alternatives that were up and to purchase risk-assets that lost some of their value.
The table below reflects the 2022 returns for various asset classes and strategy types. Some of the notable alternatives that did well in 2022 include cash (1 to 3-mos Treasury Bills up 1.6%), commodities (up almost 14% per the Bloomberg BCOM Index) and managed futures (up almost 20% per the SG CTA Index).
Commodities may continue to see some price appreciation as the same thesis of long-term under-investments coupled with the reopening of China could put upward pressure of the price of several commodities. Nonetheless, commodities may continue to provide opportunities for investors, on both the long and the short side as volatility seems unlikely to fade.
Managed futures may continue to fare well given that volatility is expected to continue in all four broad market sectors - equities, rates, commodities and foreign exchange - with many macro and microeconomic themes from which to generate a return. Those portfolios may benefit from two key characteristics which contributed to their positive 2022 performance: (1) they are actively managed to take advantage of the changing environment and (2) they have the ability to go long and short the markets they trade.
For investors that do not include, or include little alternatives, it is still time to explore them. After a long period of very low interest rates, risk-assets could experience a more turbulent path. Alternatives have proven that they can effectively diversify a portfolio. Specifically, managed futures have repeatedly proven to do so in several instances, and again proving in 2022 their risk mitigating potential. The 2022 returns for many of the trading programs available on our Galaxy Plus Managed Account platform, which can be made available if you contact us, attest to that. Clearly, the market dislocations that negatively affected equities and bonds
presented opportunities for managed futures.
Please feel free to reach out to us to answer any questions about alternative investments in general or how our Galaxy Plus Managed Account platform can provide investors seeking exposure to alternative investments.
For further information on the above strategies or about the Galaxy Plus managed account platform, please contact Marc Lorin, (312) 363-7948, firstname.lastname@example.org