Behavioral finance has shown that investors loathe losses about three times more than they love gains. In other words, experiencing the pain of a loss is graver than the gratification of winning an equivalent gain. This is the concept known as “loss aversion,” and it is one reason that we believe establishing an appropriate amount of portfolio risk is important.
We believe alternative strategies can be a significant source of risk reduction in a portfolio. For instance, alternative strategies have the potential to capture some of equities’ upside with comparably smaller downside potential. From 1990 to 2015, alternative strategies achieved 32% of the S&P 500’s monthly gains, with only 10% of its monthly losses.
Source: Bloomberg and GSAM. Analysis is based on chart data from January 1990, earliest common inception, to May 2015. Alternative strategies refers to the HFRI Fund of Funds Composite Index (HFRI FoF). Upside/Downside Capture ratio measures how much a given security has outperformed the broad market benchmark during periods of market strength and weakness. In the chart, Upside Capture is the performance of HFRI FoF relative to the S&P 500 during periods of positive S&P 500 returns. Downside Capture is the performance of HFRI FoF relative to the S&P 500 during periods of negative S&P 500 returns. The Upside Capture and Downside Capture ratio is the ratio of Upside Capture relative to Downside Capture. HFRI and related indices are trademarks and service marks of Hedge Fund Research, Inc. (“HFR”) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR’s website and other public sources and is provided for comparison purposes only.
By deploying alternative strategies in a broadly diversified portfolio, investors can seek to improve the chances of meeting long-term goals for their portfolios by reducing long-term risks.
Source: Goldman Sachs Asset Management/Strategic Advisory Solutions Portfolio Strategy. Median returns and volatilities for 10-year rolling periods from January 1, 1990 to June 30, 2015. Past performance does not guarantee future results, which may vary.