Nicholas Mitsakos

Volatile stock and bond markets are not going away anytime soon, and investment strategies focused on discipline, market-tested algorithms, and the patience to withstand near-term turbulence will continue to deliver better results.

As US stocks have dropped about 25% and US long-term treasuries dropped nearly 30%, specific strategies that combine futures, derivatives, and other securities along with market-neutral equity trading have produced superior returns. This impressive overall performance can be expected to profit from market movements and even market shocks that, while specifically unpredictable, will be inevitable from now on.

Actively managed strategies across a range of publicly traded securities, including commodities, foreign exchange, futures, and derivatives – as well as stocks and bonds – that use proprietary techniques and disciplined algorithms will continue to earn higher returns.

Risk and Return

The strategy, while generating above-market returns, also assumes much less risk. Disciplined algorithms are as much about risk management as they are about earning superior returns.

No investment strategy is worthwhile if it turns twice the market return when the market increases but also twice the market loss when the market drops. That money is better on the sidelines in an index fund.

These algorithmic strategies are proving to be superior to market performance when the market is increasing and either protecting against loss completely or losing significantly less when the market drops. Even if these investment strategies earn less than the market during good times but lose significantly less or even profit during bad times, these investment approaches are getting increasing attention from knowledgeable investors. Investors are increasing allocations directed toward targeted risk-adjusted returns generating increasing value.


Importantly, these strategies do not move in lockstep with the markets. Typically, successful alternative asset strategies capture greater returns as the market advances but protect against the downside as the market retreats. Some strategies profit from these downward movements and, on balance, give a steady return that does not exceed the market during good times but does not drop with the market during bad times. This approach has been the core of many successful large investment firms, especially Bridgewater and Oaktree. These strategies will be exceptionally attractive in the coming years.

A Rare Phenomenon

Rates are continuing to rise, even if the Fed is slowing that increase, and inflation is continuing to run at record-high levels. This is causing both stocks and bonds to underperform. Critically, strategies moving away from being in sync with the market and diverging from typical portfolio structures is proving to be profitable. This superior performance will continue.

Diversification within a portfolio isn’t the answer. A myth that is constantly pierced is that collections of equities can be uncorrelated. More often, and now it seems to be happening every time, the market moves in lockstep. Previously uncorrelated assets become correlated quickly when the market drops.

Diversification is not the real-world risk management tool theory says it can be. In practical terms, these alternative strategies are one of the few solutions that generate better risk-adjusted returns and be less correlated with market movements.

It’s Global

Interest rate movements and projections, as well as economic activity, differ by country and region, but globally today’s volatile market environment isn’t going away. Therefore, thinking globally and applying unique algorithmic strategies will protect against downward market movements and profit from volatility.

These combined strategies do not simply manage risk or create defensive strategies. These strategies offer superior risk-adjusted returns and all the asset classes they touch upon are volatile and dispersed, and the right algorithms can profit from increases in one sector while gaining from impairment in others.

This dispersion, accessed via multiple unique algorithms, is the key to delivering that superior risk-adjusted return.

It’s Dispersion

During recent bull equity markets, there was little distinction among equity asset classes, although technology and other high-growth equities outperformed other holdings. But now, energy, mining, and healthcare stocks are doing relatively well compared to those technology and growth stocks.

These distinctions are becoming magnified, even within a broad category such as “technology stocks.” There are high-growth, low-profit names that the market is punishing severely – and that punishment is not going to change anytime soon. Then there are high-margin, profitable software-based businesses doing extremely well, and the market is rewarding these names with increasing allocations.

Putting money out in certain sectors and getting a profitable trade, such as in technology and high-growth names, is increasingly anachronistic and dangerous. In other words, it just doesn’t work anymore.

Pricing risk matters more because returns are not only based on an exit price but are also based on cost (the entry price). Hopeful returns for far-reaching positive cash flows is a diminishing dream. Solid current performance with strong competitive positioning is and will continue to be, more valuable.

But, increasing volatility will impact all equities. That is why a market-neutral trading strategy can capture profitable movement while protecting downside risk and dramatic market corrections and movements.

Dispersion is back, among equities and currencies, credit, and other asset classes. Investment strategies that ignore this will underperform, or potentially, be disastrous.

Central Banks, the World Economy, and Financial Markets

Disciplined, market-tested algorithmic strategies continue to outperform. While there is no way to know how the near-term will play out, it is fair to assume continued market dislocations and high volatility. These will be characteristics of all investments and markets from now on.

One factor, among many, impacting market volatility is divergent central bank strategies. While the US Fed has been very aggressive, the European Central Bank is trailing, China is cutting interest rates and the Bank of Japan is hardly moving. Central banks seem to be working at cross purposes, and this has magnified currency diversions, market movements, and volatility among all sectors.

The world economy and its financial markets are integrated, regardless of talk of political and economic fragmentation. This market integration conflicts directly with central bank policy diversions.

This is a lethal mix of volatility. Ignoring this and assuming that it will “simply play out” is naïve and dangerous.

Algorithms driving strategies to take advantage of movements in either direction will continue to outperform. Equity neutral and multi-strategy algorithms balancing sector diversions and market volatility optimize the chances for positive performance while reducing the overall impact of downward market movements.

Macroeconomic shifts and imbalances in the economy are impacting large asset classes. These large asset classes, ranging from equities to futures, to currencies, are liquid with broad market movements. The advantage is that there is often a low correlation to broad market movements and there are profitable strategies to take advantage of changes in monetary policy, fiscal policy, high inflation, and even higher volatility.

Apathy is a Weapon

The first step in successful investment strategies is to not care about the market.

Market-neutral strategies are maximizing returns because there is high dispersion within stocks. This factor will not change and is most likely to increase. Currencies will continue just to surge and drop along with divergent and conflicting central-bank policies.

Energy, commodities, and other essential minerals and materials that drive the overall economy, as well as advanced technologies, will continue to be impacted by geopolitical and other global risks, as well as fundamental supply and demand. Supply chain disruptions will continue, and unpredictable movements are perhaps the only certain prediction.

In the face of dismal predictability and lack of confidence, it is discipline, time-tested algorithms, and a multi-strategy perspective toward broad market sectors that have outperformed and will continue to deliver superior risk-adjusted returns and better overall performance.