“Celebration” is not the word that comes to mind as market players observe the fifth-year anniversary of the Lehman Brothers crash.
Rather, what now inspires investors to remember the crash is the cautionary tale it offers of the terrible things that can happen when the financial world spins out of control. Indeed, “caution” is a better word to describe why anybody should mark the date of Sept. 15, 2008, when Lehman filed for bankruptcy, according to Jon Sundt, president and chief executive of alternative investment firm Altegris.
“I think 2008 crystallized this idea that you need to be diversified,” Sundt (left) said in a recent interview with ThinkAdvisor. “The people who didn’t have diversified portfolios to this day are still suffering. It’s a stark reminder that you had better build a portfolio that can survive bad unforeseen outcomes.”
Sundt remembered that he was sitting at his desk in Altegris’ headquarters in La Jolla, Calif., the day that Lehman crashed.
“It was a bit of ‘shock and awe,” he recalled. “We had dozens of managers that we allocate to and thousands and thousands of investors. My biggest concern at the time was: Do we have any counterparty risk? We quickly determined that we had no direct exposure to Lehman. Some of our managers didn’t do so well, but those in the managed futures space did well, and so did people with hedges.”
Sundt’s own firm has gone through transmutations since the Lehman crash. After he founded Altegris in 2002, Genworth Financial bought his firm in 2010 for approximately $35 million, and earlier this year Genworth sold its wealth management unit, including Altegris, for $412.5 million to a partnership of two private equity firms, Genstar Capital and Aquiline Capital. Altegris currently has more than $4 billion in assets under management and employs 120 individuals.
Today, Sundt focuses much of his energy on promoting the idea of using equity and fixed income long/short strategies as core allocations. To be sure, that focus stems from Altegris’ relatively recent launches of the Altegris Fixed Income Long Short (FXDAX, FXDIX, FXDNX), on Feb. 28 this year, and the Altegris Equity Long Short Fund (ELSAX, ELSIX, ELSNX), on April 30, 2012.
Year to date, according to Morningstar, FXDIX has outperformed its benchmark, the Barclays U.S. Aggregate Bond Index (which tracks the broader debt market in the same way that the S&P 500 follows stocks), with a $10,000 investment in FXDIX currently yielding $10,090 versus the Barclays index’s $9,686. The growth of $10,000 for ELSIX currently comes to $10,915, underperforming the benchmark S&P 500 index’s $12,018 by a wide margin.
“This is a prudent approach,” Sundt said in defense of ELSIX’S underperformance. “You want to participate in this party, but you don’t want to drink too much. You want to participate in a way to preserve capital. A great way to do that is equity long/short. Our managers have exposure to the market for the upside but short positions in case the market corrects. If you’re 100% net long, you can get hurt.”
Similarly, Sundt noted, FXDIX offers a smoother ride for fixed income investors during an extremely volatile period for bonds. “If you have a portfolio with a lot of holdings, it may be a good idea to get into a long/short fixed-income fund, which is a corollary to long/short equities,” he said.
More thoughts from Jon Sundt on why fixed income long/short is a good idea:
- Normal bond funds that investors sought out as “non-risky” investments are not as safe as they used to be when rates were at record lows. With a rise in interest rates on the horizon, these lower risk funds could end up hurting a portfolio’s total return.
- The bond market may not turn as drastically as people fear, but it does require a change in asset allocation strategy. Fixed income portfolios should employ more flexible strategies that can be found in mutual funds with the ability to go long and short.
- Investors should look for a multi-disciplined, nontraditional approach to fixed-income investing, with moderate correlation to major fixed-income indices.
- Long/short managers combine fundamental analysis with effective duration management across various credit and interest rate environments.
Read 5 Years After Lehman Crash: ‘Dark Times’ Ahead at ThinkAdvisor.