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Portfolio > Portfolio Construction

One Way to Protect Client Portfolios From Europe

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The situation in Europe continues to deteriorate. As rates on the continent’s sovereign debt continue to increase, it is increasingly difficult to making interest payments without issuing new debt. Europe remains the biggest threat to U.S. economic growth as well; if there is a systemic breakdown there, it will very likely propel the world into a global recession.

Many of our advisors are no doubt wondering how to protect client capital during this period and if there are any ways to profit from the crisis. We had an interesting discussion in the office several days ago about this. A portfolio designed to exploit the two most likely Europe scenarios – that the ECB will buy the outstanding European debt (by printing euros) to drive rates lower (i.e., quantitative easing), or the elimination of several of the weaker EU member states – would include such positions as short euro, short euro stocks, long EU fixed income, long gold, long the U.S. dollar, etc. Many of these positions are difficult to express for retail investors.

One way to get this basket of trades in one convenient investment is to simply buy a trend-based managed futures mutual fund. These products engage in a variety of domestic and international markets, although the financial sector (i.e., global and domestic fixed income, equity indices and currencies) makes up their largest positions. Since these funds exploit prices trends in the marketplace, many of the positions mentioned above are likely represented in their portfolios. 

There are a plethora of managed futures mutual funds to choose from, a task that I will leave to the reader. As long as trend-following is the core strategy, and the fund is mainly focused on financial markets, it should be an adequate hedge.     


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