DIANE HARRISON Its Always RelativeThat Is, In Performance

This article first appeared on January 7, 2014: http://www.hedgeworld.com/blog/?p=10321

Its Always RelativeThat Is, In Performance

nother year draws to a close and, despite a host of genuine economic struggles and long-standing global structural weaknesses, the equity markets posted some spectacular gains in 2013. With major index total returns delivering near 30%, it makes it hard for investors to care all that much how other investment categories fared over the year.

And while cogent excuses for lesser performance can be offered by experts for everything from commodities to real estate, bonds to gold, the rationale falls upon the selectively deaf ears of equity-rich investors who gleefully cheer their balance sheet totals courtesy of their stock holdings. But, as even the smallest child knows, what goes up generally falls down, and an equity comeuppance will be due in time. Soon, these same investors will be lambasting the stocks that ultimately fail to perform, and wondering why they hadnt exercised more diversification discipline in their portfolio selection. Their stock seduction of 2013 will turn to regret when a pullback occurs down the road. HELLO? IS NO ONE LISTENING? Meanwhile, what has happened to the bastion of diversification in portfolio objectives? According to an investor survey taken by Prequin in mid-2013, Preqin Investor Outlook: Alternative Assets H2 2013: While more than a quarter of investors in hedge funds were dissatisfied with the returns they had received in the past year, a large proportion of investors in hedge funds have significant allocations to the asset class, suggesting that many investors do not allocate solely to generate returns, but also because of the liquidity, diversification and volatility dampening that the asset class can provide. Although a greater proportion of investors in hedge funds plan to reduce their allocations than any other alternative asset class, investor appetite remains strong, with 88% of investors allocating the same amount or more capital in the coming year than they did in the last 12 months, and 82% maintaining or increasing their allocations to the hedge funds in the longer term. Why are so many sales peopleoutside of the equity businesslamenting the difficulties they have faced in getting anyone, conservative to greedy, to pay any attention to their alternative offerings? Perhaps its time for a brief refresher course on the basics of diversification, as we all reset the marker on year-over-year performance. There is a simple and yet useful summary of some of the more popular reasons to put your proverbial eggs in different baskets on an Australian blog site, Pdxapi.com (10 Reasons to Diversify your Investment Portfolio). Three of its top 10 highlights include: Diversification works because returns on investments can be maximized as the different areas in which money may be invested will react differently to the same event Although diversification cannot eliminate the possibility of a loss, it can help to absorb the impact of market volatility on an investment portfolio
PANEGYRIC MARKETING| JANUARY 2014

DIANE HARRISON Its Always RelativeThat Is, In Performance

Diversification is a good long-term financial strategy because it will typically result in fewer fluctuations and fewer losses Nothing revolutionary there; but nothing irrelevant either. The alternatives sales force should pay attention to these basic characteristics of sound investment selection and promote the primary long-term goal of achieving diversification, not beating the stock market, when talking with their clients. THE WOLF MAY BE KNOCKING ON 2014s DOOR Assuming a salesperson can get an investors attention, what are some of the arguments for risk control that might help to get the diversification ball rolling on the heels of 2013s blockbuster year in equities? Lets take a look at several potential economic risks undermining future equity performance, courtesy of the United Nations in its study released in mid-2013, World Economic Situation and Prospects 2013. The paper makes some forward-looking projections for 2014: New medium-term risks have emerged, including possible adverse effects of unconventional monetary measures in developed economies on global financial stability. These risks have the potential to once again derail the feeble recovery of the world economy. In the euro area, sovereign bond risk premia of debt-distressed countries have fallen notably, but the real economy is held back by austerity programs, weak bank lending and continued uncertainty, and only a very gradual recovery is expected as these factors diminish. Significant downside risks remain if the vicious cycle of deleveraging and banking sector fragility continues unabated. The employment situation remains a key policy challenge in a large number of economies, as the world economy continues to expand well below its potential. The unemployment rate in the United States has fallen, but is still high by historical standards and the drop partly reflects a significant decline in labor force participation. Long-term unemployment remains near historic highs. The upward trend of private capital flows to emerging economies is likely to continue as significant growth and interest rate differentials will persist in the near term. The current environment of low global interest rates, moderate volatility and rising risk appetite among investors poses, however, considerable risks for emerging economies. A further surge in capital inflows could lead to an appreciation of domestic currencies, excessive credit growth, and to a build-up of significant leverage and asset price bubbles. IN SHORT, WE DONT KNOW WHAT WE DONT KNOW While risk can come from any number of directions, with or without warning, and on its own time schedule, its fair to say that risk will come, and 2014 is not immune to it. While no one would argue for a mass exodus from the equity markets to any particular asset, prudence suggests that investors take a hard look at the stance they have taken in their current portfolio, to determine whether a reallocation is in order to boost diversification.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. A published author and speaker, Ms. Harrisons work has appeared in many industry publications, both in print and on -line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com. PANEGYRIC MARKETING| JANUARY 2014