As we enter the summer months, the world feels pretty good indeed. Despite a volatile start to the year, the U.S. equity market has fully recovered and conquered new highs. It appears that the multiple rounds of the Federal Reserve’s Quantitative Easing (or “QE”) have successfully reflated the economy, evidenced by corporate profits near record highs, and corporate debt default rates near record lows. Individual investors are again feeling bullish and are plowing back into the market.
Our experience tells us that we are approaching a time for caution – periods of extremely low volatility often sow a false sense of security in the collective consciousness of investors, which ultimately results in periods of substantial dislocation. As a firm we look forward to periods of dislocation in order to take advantage of the herd mentality. We don’t view an imminent correction as inevitable, but we believe risk assets today are not attractively priced.
We believe the risk‐reward dynamic today has shifted substantially against risk takers and the opportunity cost of being cautious today is fairly minimal. Our strength is identifying the most compelling opportunities and sizing the exposure appropriately when the market does reprice. While higher volatility brings greater downside risks, which we cannot completely avoid, our core strength in understanding both traditional and alternative strategies provides us with a toolbox to be proactive during market dislocations rather than being forced to react to prevailing markets.