Asset Volatility Reduced Using Alternative Strategies

Consider this!

Currently in India an investor has access to the following markets to generate returns:

  1. Equities
  2. Bond Funds
  3. Fixed Deposits
  4. Real Estate

However the thing to notice is that the above avenues are more or less similar in terms of correlation except real estate and fixed deposits.

  • Fixed deposits are not an attractive investment avenue due to its tax implication and negative growth if you consider the post tax return.
  • Real estate used to be a good hedge against the general market however if you consider it now, real estate has already appreciated to a limit where a slow down is imminent.
  • Bonds and Equities are and will be the major contributor to an investors wealth in the long term, however in situations of a bubble, all hell comes down knocking.

Avenues Neglected:

Commodities, Currencies and Agri Commodites

There are overall 9 assets in commodities segment which trend and can generate returns for an investor

  1. Gold
  2. Silver
  3. Zinc
  4. Crude Oil
  5. Natural Gas
  6. Copper
  7. Soyabean
  8. USD/INR

Problem with Commodities

The problem with these assets is that they individually is very difficult for investor to juice our returns even in long term due to the very nature of it. For eg

  • Gold +12.1% Since 2008
  • Siver:+9.1% Since 2008
  • USD/INR+4.6% Since 2008
  • Crude -3.8% since 2008
  • Copper +0.8% since 2008
  • Zince +4.7% Since 2008
  • Natural Gas -4.6% since 2008

The above data shows the return generated by each assets since 2008. However even if you were invested in any of these assets, the volatility would have been very high For eg:

  • Crude Independent Vs ERIC in Crude

If you watch crude independently then the volatility has been preety high with no returns if held since 2008, however if you used ERIC advisory services in the same asset, we would have generated +6.8% instead of -3.8%

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  • Copper Independently Vs ERIC in Copper

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Again in the above graph copper has not really generated any return but has moved up and down a lot. The stable line is how ERIC was able to generate returns in the same volatile asset.

 

Counter Intuitive Benefit To Your Portfolio

The intuition here is that by getting exposed to commodities you increase your volatility but in reality the overall portfolio volatility is actually reduced due to lower correlation. Which is what gets proved here. All the stats improved from your standard deviation to your sharpe and even drawdown.

portfolio-analysis

 

Allen Aravindan, CFA

 

 

 

 

 

 

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