Risk exposure with “Unconstrained” or “Strategic fixed income”
As famed bond investor Bill Gross warned the investing public earlier this year, traditional fixed income appeared to present undue risk. How did the investing public react? Billions of dollars have poured into mutual fund strategies that are marketed as "Unconstrained" or "Strategic fixed income", which are armed with mandates that allow them to make short bets against the market. These funds offer goals of "absolute returns" and low correlations to traditional asset classes to their investors. Relative to their more traditional mutual fund peers, these strategies appear to be light on bonds and heavy on derivatives. Additionally, other strategies such as managed futures and global macro investing typically reserved for qualified investors have liberalized their investor base by launching mutual funds. As you may have guessed, these strategies are heavily reliant on derivates such as swap contracts with investment banks, which can lead to counterparty and liquidity risks. Do private individuals, or their advisors, truly understand the risks associated with these investments and their portfolios that are increasingly laden with complex financial instruments? Are the higher costs associated with these more opaque strategies worth their price tag?
If we were to extrapolate lessons from the implosion of financial assets in 2008, a logical take-away would be to truly understand risk in one’s portfolio. The loss of value in the synthetic, yield producing, "alphabet soup" securities (CDOs, CLOs, CMBS, etc) offer a harsh reminder of the potential downside of financial innovation for the investor. The current trend in asset management, relying on exotic instruments such as CDS (credit default swaps), futures, forwards, and swaps within the mutual fund format, does not inspire confidence that the average investor is aware of their risk exposures.
If you feel that your portfolio has suffered due to risks that you were not properly made aware of, please do not hesitate to contact us.
