Election risk management and liquid alternatives - October 2016

In July, we spoke a bit about what a Donald Trump presidency could mean. As we noted, his candidacy has massive implications both socially and for the markets, but we are not sure of what they are.

While this sounds like a non-answer, we think it is accurate. To be fair, we did say that we felt he had a very real shot at winning. While this surprised some, to be clear it is not based on our political view (we are Canadian after all), but is simply based on statistics, history, and the reality of "dark horse" candidates.

In the final days leading up to the election, candidates say whatever it takes to garner attention, and in some cases, with complete disregard to the constitutional possibility. What’s said on the campaign trail and what plays out in reality is, of course, a whole different matter.  Once candidates take office, many realize that they aren't able to do what was promised, leading to a common electoral phenomenon of inaction. After all, the old saying has never been, "trust politicians to keep their promises.”  It is only once there is a winner, that we will be able to dissect campaign rhetoric from reality.

What does this mean for portfolios?

Regardless, while we offered possible implications for commodities such as metals, agriculture and energy, when it all boils down, the most relevant driver is fear.  As with any unknown, especially one that has the potential to instill widespread change like the impending US presidential election, investors can get spooked and sentiment may be adversely impacted. This could create volatility in equities, and even safe havens like gold. Energy and industrial metals are not safe either depending on which candidate’s policies and plans become realities (or at least become clear...).  At the end of the day, a surprise either way may create market corrections or large moves, depending on the liquidity available as many market participants will undoubtedly bide their time and watch from the sidelines.

 So what is there to do? The answer is the same as always: risk management. 

If your portfolio has high market exposure, you have no choice but to roll the dice and wait. If you are concerned, you could always exit exposures and increase your cash position. But the best recommendation depends solely on your level of protection.

If you have exposure to non-correlated alternatives such as CTA or managed futures funds, you may be in the best position seeing as you are able to generate returns regardless of market direction, and especially in times of volatility. If not, don’t worry, it’s not too late. While many funds only offer access monthly, anyone can buy so-called "liquid alternatives" at any time.  To get immediate exposure, there are both ETFs and 40 Act Mutual Funds that can be accessed daily. We are happy to point you in the right direction in Canada or the US as this is precisely why we exist:  to create easy access, liquidity and risk management in the face of unknowns.

Sometimes, it’s okay to play defense, and non-correlated liquid alternatives are an ideal way to access these tools and increase your portfolio’s resilience in short order.