How to Capitalize on Three Emerging Macro Trends

In energy, Salient’s platform creates “diversified return streams,” specifically in the (what else?) mid-stream MLP market. The firm also offers trend-following and risk parity strategies, the former of which he claims is “one of the best diversifiers to traditional portfolios.”

As to the latter, Partridge points to a recent white paper the firm produced titled, “Risk Parity in a Rising Rates Regime.”

“There are entirely sensible reasons to have long-term concerns about bonds in light of current interest rate levels, and given the historical tendency of risk parity strategies to have large positions in bonds, the concern for risk parity in a rising rates regime is understandable,” the white paper concludes. “Evidence from the last rising rate environment indicates, however, that critics of risk parity potentially understate the potentially diversifying influence of commodities in these periods, the responsiveness of risk parity strategies to changes in asset volatility and the dynamic incorporation of changing correlations in many risk parity implementations.”

Um … what does it all mean?

“From our analysis of a typical portfolio in the 1970s (the last period of sustained rising interest rates), we found that adding momentum to risk parity improved performance to where it dominated a traditional 60/40 portfolio.”

Partridge notes two other strategies the firm is using to capitalize on the three trends, strategies that thankfully don’t require quite as much explanation.

“Our alternative beta is negatively correlated to equities, so when they’re down the alternative beta performs very well. And it’s much cheaper than tail-risk insurance. Finally, our global equity fund is there to specifically take advantage of what we talked about in emerging markets.”