We believe that investing in stocks and bonds using a buy-and-hold approach is not likely to achieve the returns that most investors expect based upon their experience over the past 30 years—the returns are likely to be lower, and the volatility higher, than many investors expect. Thus, diversification of stock and bond investments, always important, will become even more vital. Alternative investments can meet this need.
However, a buy-and-hold approach to investing broadly in alternatives is also likely to disappoint. Many forms of alternative investment, including most hedge funds, have high correlations to stocks and bonds, and mediocre returns after costs. Selectively investing in only the most attractive alternative strategies and asset classes at the right time is the best approach in our opinion.
We use proprietary multi-factor models that combine elements of value and momentum to help us identify those strategies that are poised to generate attractive returns. In our “evidenced-based investing” approach, each factor is weighted according to how well it has predicted returns in the past. Thus, in our investment process, the market itself drives our models, not our subjective prognostications. Our approach is self-correcting in that our process automatically adapts to changing market conditions.