After the Election: Capitalizing on Market Sentiment and Volatility

In our alternative portfolios, we have the flexibility to use a range of sophisticated strategies—bullish, neutral and bearish hedges, convertible arbitrage and covered call writing, etc. While the tools we use can seem complex at times, our guiding principles are straightforward:

  • Take advantage of opportunities the market presents. This includes changing our overall hedge stance (bearish, neutral or bullish), and adjusting our convertible arbitrage positioning, among other strategies.
  • Focus on being as advantageously positioned for as many outcomes as possible.

Our investment philosophy can help us capitalize on market volatility, and we are positioned to apply the same approach in the post-U.S. presidential election market.

For a real-life example of how we pursue opportunities, here’s a review of the weeks before and after Brexit.

The Pre-Brexit Environment
About a month or so before Brexit, the U.S. equity market had rebounded from its February lows and was back near recent highs and the VIX had fallen from its February spike. While we typically have a hedge profile and structure we may prefer for our funds, it is important to focus on whether that is ideal in the current market environment. We continually search for a hedge that gives us as much downside protection as possible, while giving up as little participation as possible in a market rally. Depending on the market environment, this could mean using shorter-dated or longer-dated options, as well as increasing or decreasing our use of spreads, puts, or calls. These moves are incremental to our core hedge, which we use to maintain a base of downside protection at all times.