Post-Lehman Crash, Altegris’ Jon Sundt Defends Alternatives as Hedge Against Volatility

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.

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Read 5 Years After Lehman Crash: ‘Dark Times’ Ahead at ThinkAdvisor.