PURUSHOTHAMAN S S, FOUNDER, NILA INVESTMENT AND SERVICES.
A street vendor sells cold drinks during the hot summers. As the season turns and brings in the monsoons and winters, he switches to selling warm tea and coffee, as cooler temperatures bring down demand for cold drinks, and in turn prices and profits. By adapting his offering, he insulates his business from changing weather conditions.Asset allocation in investment portfolios works in a similar way. The investor holds a mix of asset classes like equities, debt, and commodities, each of which respond differently to changing economic conditions, in a bid to insulate their portfolio from the vagaries of the economy. Equities tend to do well when the economy is flourishing, commodities like gold perform during periods of inflation or uncertainty and debt provides relative stability when riskier assets struggle. Allocating across these asset classes ensures that some part of your portfolio is always working in your favour across economic cycles, reducing the impact of underperforming assets.Now, what if we could take this a step further? What if that street vendor could not only switch products with the seasons, but could also lock in the purchase price of cold drinks in advance? Or enter into a contract to sell cold drinks at summer prices in non-summer months? That would mean his margins are protected from any price corrections in the cooler seasons.Similarly, in investing, in addition to asset allocation and diversification, investors could use long-short strategies to lock in asset prices for a future date and protect themselves from any adverse asset price movements. By going long on assets expected to outperform and short on those expected to falter, investors can reduce dependence on market direction, limit downside and smoothen out portfolio performance. When you go long you buy assets at current prices and profit when you sell them at higher prices. When you go short you sell assets at current prices only to buy them back later at lower prices, the difference becoming your profit.Used along with asset allocation, long-short strategies can add another layer of resilience to portfolios. They aim not just to participate in growth but also protect capital during downturns, helping investors navigate market ups and downs with peace of mind and potentially improved investment outcomes.Investors can invest in such sophisticated strategies through Specialised Investment Funds (SIFs). SIFs are for mutual fund investors looking to add portfolio management services (PMS) like flexibility to their portfolios but don’t want to commit to the larger upfront investments that are required to invest in a PMS. With a minimum investment requirement of Rs 10 lacs, SIFs can enhance investment portfolios with the use of derivatives. An Active Asset Allocator Long Short SIF is a hybrid strategy which aims to generate returns with lower volatility through shifting allocations between equities, debt, commodities and derivatives opportunistically.Today, markets are frequently pulled in different directions by wars, crude prices, currency movements, FII flows and trade disputes. Through asset allocation, these funds aim to participate in long-term market and asset cycles. Through long-short strategies, these funds manage beta and aim to make the interim investment journey smoother.With one eye on the horizon, and the other anchored to near term market developments, an Active Asset Allocator Long Short SIF can be a compelling investment in these uncertain times.
