LC Diversified Fund
LC Diversified Fund
- Diversification is a timeless and universal principle of investing allowing you to capture maximum returns per unit of risk.
- Conventional asset class diversification with US stocks and bonds has been successful, but we believe most investors are overly reliant on this approach.
- We believe a highly diversified, moderately leveraged, multi-factor global portfolio carries less risk than a traditional unleveraged portfolio concentrated in US large cap stocks.
Lorintine Capital launched LC Diversified Fund I in 2016 to address what it perceived as a product gap in the investing market place. Moving from a few individual stocks to a broad market index fund such as the S&P 500 is certainly a step in right direction, but still has risk concentrated in a single factor, equity market beta, which has downturns highly correlated to periods of economic stress. Asset allocation and target retirement date mutual funds and ETF's typically only add one additional portfolio diversifier, known as the term factor, in the form of bonds. Since stocks tend to be 3 to 4 times more volatile than bonds, the diversification benefits are minimal, even for bond allocations as large as 40-50%. In a portfolio constrained from the use of leverage, adding bonds also lowers expected returns.
LC Diversified Fund attempts to solve this problem by investing across 5 strategic factors in a more risk balanced manner:
1. Dual Momentum. LC Diversified captures both the relative strength and absolute momentum premiums in global stocks primarily through the use of ETF's. Momentum is the concept of short term persistence of performance. Relative strength momentum compares the recent performance of one asset class to another, such as US vs. Ex-US stocks, to determine which should be held for the next 1-3 months. Absolute momentum looks at the recent performance of the stock market as a whole as an indication of whether or not it's likely to continue rising or falling. When absolute momentum signals turn negative, positions will systematically de-risk to the protection of money market or US aggregate bond ETF's.
2. Global Small Value. LC Diversified captures the global size and value equity risk premiums primarily through mutual fund allocations to Dimensional Fund Advisors (DFA). DFA has pioneered the concept of factor investing since the early 1980's by planting its roots in the academic community, with several board members going on to become Nobel Laureates. The global small value factors are the intuitive concepts that small companies have more risk and potential growth than large companies, and companies with lower relative prices (value) have more risk and potential growth than those with higher relative prices (growth). This intuition of higher expected returns as rational compensation for risk is persistent and pervasive in historical market data, with the small cap value asset class outperforming the total market, on average, both in the US and elsewhere.
3. Global Fixed Income. LC Diversified captures term, credit, and relative strength momentum premiums in the global bond markets through bond ETFs and DFA mutual funds. High quality fixed income with limited maturity provides stability to the portfolio and a ballast during equity downturns.
4. Alternative Growth. LCD Fund captures long/short factor premiums of value, momentum, trend, carry, defensive, volatility and trend through quantitative managers such as AQR Capital.
5. Volatility Risk Premium. The persistent tendency for implied volatility to exceed realized volatility in derivative contracts such as the options and VIX futures market is referred to as the Volatility Risk Premium (VRP). Sellers of these contracts provide liquidity to market participants seeking the equivalent of stock and other financial markets insurance to hedge their long positions. Exposure to the VRP is gained by directly selling equity index and ETF options, futures options, and VIX futures contracts.
For more information regarding the Fund, including performance information, the full private placement memorandum, disclosure documents, presentations, and subscription documents please click below.
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