Alex Lee
The question for many about negative correlation is that it works until it does not work. Sadly, everything seems to go down together in a major market downturn – the very outcome investors want to avoid by investing in Alternatives.
As we have seen in major market meltdowns, all asset classes fall in unison. This includes many hedge funds that have failed when they should have prevailed in falling markets because of interest rates, market irrationalities, whatever.
Indeed, Fixed Interest has had falls but the performance of the sector in low inflation/low interest rates has been unspectacular. The current bond market has been described as “return-free risk” by Warren Buffet.
Alternative strategies are often more expensive, less liquid, usually difficult for both the investor and his advisors to understand and typically lose their diversification characteristics in times of stress.
A bleak history of negative returns from supposedly alternative strategies
Investors have regularly been disappointed in “Alternative” strategies as they all become correlated on the way down:
- 1987 – “portfolio insurance” as marketed by the investment banks – Dow down 22.6% on Black Monday (October 19, 1987)
- 1991 -2001 Japan’s lost decade: stock market crash caused by excess debt. Neither the Japanese market nor the economy has fully recovered. The 1991 backdrop in Japan eerily like today’s global backdrop
- 1997 – Asia Crisis – Asian currencies down between 34% and 83% / massive debt defaults – negative impact on other regions
- 2000 – dot-com bubble in the USA – Microsoft stock (then the established tech darling) falls 62% in one day (20 March 2000)
- 2008 – Global Financial crisis – Bubble in sub-prime lending / mis-pricing of risk / caused by too much easy credit
- Nearly all self-proclaimed alternative strategies declined in these periods of stress
Many of the aspects of the backdrops to these crises are present today in the global markets.
Life settlements as an asset are non-correlated to markets
The life settlements sector – buying insurance policies off older Americans who no longer need the coverage – is structurally non-correlated to the share market, the bond market and property price movements.
It’s correlated to people’s life policies not the market.
The fund compares favourably to the S&P 500.
Laureola Life Settlement Fund vs the S&P 500:
- 8-year track record: Since inception April 2013
- $100 invested in Laureola in April 2013 worth $315 on 31 August 2020
- $100 invested in the S&P 500 in April 2013 worth $243 on 31 August 2020
- 26 negative months for the S&P 500; 2 for Laureola
- Arithmetic Total of the 26 monthly returns: -89% for S&P; +18% for Laureola
- Feb 2020: S&P minus 8.4%; Laureola Fund +0.3%
- March 2020: S&P minus 12.5%; Laureola Fund + 0.3%
Laureola is a boutique Fund Manager focusing on the asset class of Life Settlements. Our Fund is specifically designed for Private Clients and small to medium sized Family Offices. A well-managed portfolio of Life Settlements will keep its diversification characteristics in difficult times, as the strategy has a very different way of making money – investing in the longevity and mortality markets.
The fund has achieved expected returns of 8% to 12% achieved in every year (except one which was +6.4%). The Laureola Fund delivered a positive return in 86 of 88 months that it has been in operation.
By Alex Lee CFA, Director, Investor Relations – Australia and New Zealand