Astoria’s big call for 2018, was that investors needed to hedge their risk assets given the pending decline in liquidity resulting from Fed tightening and central bank balance sheet reduction would result in higher dispersion and volatility. After an 8% pullback in S&P 500 and VIX touching 50, I guess we made the right call.
Investors should throw 2017 out the window. Last year’s risk adjusted returns are unprecedented nor sustainable. You simply can not have the S&P 500 producing a 3 Sharpe Ratio or a 70% ACWI / 30% AGG index recording a 7 Sharpe Ratio. Investors carelessly levered up in 2017 judging by the performance (and positioning) in growth, momentum, and short volatility strategies.
At Astoria, we have modeled for this spike in volatility. We are constructive on assets where there is a margin of safety (international value, emerging markets equities & FX, deep US cyclicals) but we are hedging all our risk assets with ETFs that carry well to produce attractive risk adjusted returns.
We view this sell-off nothing more than de-risking and systematic selling resulting from risk parity, CTAs, and covering by short VIX strategies which all are intimately tied to liquidity and reinforces a vicious negative feedback loop.
Fundamentally, US earnings are still coming in strong, the global economic recovery remains in sync, and recession risks remain low. We envision a bit more selling pressure before fundamental buyers step in to support the market, as they typically do.
We went into 2018 with excess cash and we are using it to purchase some of our favorite longs while increasing our hedges. Some of our top ETF ideas include IEMG, IXUS, KBWB, IVAL, IMOM, and COMB. On the hedging side, we are utilizing QAI, IAU, SHYD, VRP, SRLN, and cash.
Best, John Davi
Founder & CIO of Astoria
Astoria holds positions in each of the above ETFs for its clients. ETF holdings are subject to change. For complete disclosure, please refer to our websitehttps://www.astoriaadvisors.com/disclaimer