Gold does not produce any income, which I’ve mentioned before and its value is aided during periods of low interest rates. Investor’s view gold’s protection from inflation worth it when they are barely giving up any yield. However, rates have been rising which has a negative impact on gold’s price. This quarter, the rise in interest rates more than offset inflows from inflation fears.
Other commodities are also seen as portfolio protectors during inflationary periods and the Bloomberg Commodity Index moved with inflation posting the largest annual gain in over 40 years. West Texas Intermediate (WTI) Crude Oil was one of the primary contributors to that gain – it has increased 55% YTD ending the quarter at $75.03 a barrel. During the third quarter, global real estate and broad hedge fund indices both trailed the S&P 500.
Another common alternative strategy is the market neutral strategy. This involves strategically taking long and short positions in various securities in order to achieve a zero beta versus the index. Beta is the measure of how an asset moves in relation to increases or decreases of the overall stock market – a beta less than 1 indicates lower volatility compared to the market while a beta greater than 1 indicating higher volatility. The primary goal of this strategy is to hedge out systematic risk, which is the risk of the overall market. Market neutral strategies tend to provide bond-like returns in rising interest rate environments while providing lower volatility as compared to both stocks and bonds. Rates have already begun rising this year, as mentioned above. We are monitoring all of the alternative asset classes closely and may look to increase our allocation to market neutral strategies. We maintain our recommended overweight to alternative investments and will continue to explore strategic opportunities within the alternative space.