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  • Mark Beardow

New sources of portfolio protection

Equities have experienced more regular and deeper negative shocks in the last 5 to 15 years than typical of the last 60 years.

At the same time Bonds have lost much of their capacity to deliver positive returns to offset equity shocks and negative correlation has also become difficult to rely on.

This threatens the benefits of diversification from traditional balanced funds and potentially total returns.

We have researched new protection strategies and believe volatility and currency hedging tools can be very effective protection and accretive to returns.

The table below from the backtest shows the significant return and risk benefits that the new strategy would have contributed to our existing Darling Macro Index. (January 2016 to June 2021).

The key takeaways are: (1) A return enhancement over the existing Darling Macro Index, (2) A reduction in maximum monthly drawdown, (3) high liquidity during selloffs, and (4) lower overall correlation with Australian equities (16% to 9%) and US equities (31% to 7%).

Alongside the backtesting we have also been conducting a live test of the strategy using our founder capital which has enabled a testing of systems and has reinforced the results of the backtesting.

We are currently planning how the new strategy would be incorporated into the Darling Macro Fund and will be communicating the details of this shortly.

This period includes 2 major volatility spikes (Feb 18 and March 20) which were very fertile environments for the new strategy. Looking forward if volatility spikes occur less frequently then the benefits may be less.

Our longer term back testing suggests a performance uplift closer to 1%. However our view is that volatility spikes may be more frequent than have been experienced in the longer term test.


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