Nobody knows what tomorrow is made of.
We tend to forget that, but in markets, it’s something we should always keep in mind.
The year started with cautious optimism. Macro conditions were holding up well, and global equities posted modest gains, although dispersion was already increasing.
Gold and silver continued to rally, before losing momentum at the end of January following the announcement of the future Fed president.
In fixed income, returns were mixed, while credit markets continued to benefit from strong risk appetite.
That relatively smooth environment came to an abrupt end at the end of February, with the outbreak of the conflict between the US, Israel and Iran.
In March, oil prices surged following the closure of the Strait of Hormuz, while at the same time precious metals declined.
Inflation fears quickly returned, pushing rates higher, especially at the front end of the curve. Expectations shifted rapidly, moving from anticipated rate cuts to renewed rate hikes.
Credit spreads widened significantly, and equity markets fell sharply, led by emerging markets and energy-dependent regions such as Europe and the UK.
In short, markets experienced a moment of real stress. Investors were wrong-footed, correlations moved toward one, and fixed income did not provide the protection many were expecting. There was, effectively, nowhere to hide.
This is exactly the kind of environment where active management becomes essential. In volatile markets, flexibility is critical. Active managers can adjust portfolios quickly, implement hedges, raise cash, and protect the downside, while avoiding crowded trades and forced deleveraging.
At the same time, they are able to act when others cannot. They can take advantage of indiscriminate selling and build positions in assets that are temporarily mispriced and trading at attractive levels.
Historically, only around 20 to 30 percent of active funds outperform in normal market conditions. But in more adverse environments, the picture changes significantly, with around 60 percent of active liquid alternative managers tending to outperform. While it is still early to draw firm conclusions, recent market behaviour is likely reinforcing this dynamic.
And this matters. Because a portfolio that falls by 20 percent needs to gain 25 percent to recover, whereas a portfolio down 5 percent only needs a little over 5 percent. Managing downside risk is therefore not just important, it is fundamental.
Ultimately, a well-selected combination of active strategies provides a strong anchor for a portfolio. It helps reduce volatility, allows for a more contrarian approach, and creates the conditions to build future alpha.
Be diversified, be decorrelated, and be active.
