Market neutral strategies swerve volatility, diffuse market risk

While an increase in market volatility has shaken portfolios over the past year, investment managers employing market neutral strategies that make even bets across the long-short spectrum have had a better time of it.

Taking short positions in stocks slated to decline while going long on stocks expected to rise is just one side of the equation. According to Sage Capital managing director and chief investment officer, Sean Fenton, taking a disciplined approach to market neutrality – ie similar or comparable long-short positions – is what really takes the wind out of a stormy market.

“At a time when asset correlation is being significantly questioned amid market falls, liquid alternatives such as market neutral can help diffuse market risk and provide a source of uncorrelated returns to other assets,” Fenton said in a recent release to mark the 3-year anniversary of Sage Capital’s two leading funds.

“These strategies offer potential alpha opportunity for many long-only investors seeking to diversify away from traditional equity and fixed income allocations. These factors as well as the ongoing search for yield and stable return streams are driving investor appetite.”

The fund manager notched three years with its two leading funds each significantly outperforming their respective benchmarks recently, something Fenton attributes to the uncorrelated nature and market neutral style of the inherent investments.

Being agile enough to react to emerging market opportunities also plays a significant role, he explained.

“We categorise the market into eight proprietary ‘Sage Groups’ and focus on selecting stocks within them to give us the flexibility to incorporate rapidly shifting company information into the portfolio without taking large binary style positions,” the CIO stated.

“Performance has been driven by strong stock selection within these Sage groups which include defensives, domestic cyclicals, global cyclicals, gold, growth, REITs, resources and yield.”

Sage provides an alternatives solution (CC Sage Capital Absolute Return Fund) and an Australian equity solution (CC Sage Capital Equity Plus Fund), both of which rely on a relatively similar investment process.

The Equity Plus Fund is an Australian equities allocation benchmarked to the S&P/ASX200 Accumulation Index, which it outperformed by 6.63 per cent after returning 12.24 per cent per annum net of fees for the three years to 31 August 2022.

The manager’s alternatives solution, the Sage Capital Absolute Return Fund, is designed to provide exposure to Sage’s stock selection and risk management framework whilst eliminating overall exposure to the underlying equity market. Over the same three-year period the fund returned 11.51 per cent per annum net of fees, outperforming its benchmark (RBA Cash Rate) by 11.21 per cent per annum.