The Times They Are A-Changin’

As we approach the end of summer, here’s my perspective on economic issues worth watching.

The big new noise is the July employment report. Job growth surged, according to the Department of Labor. The US economy added 255,000 positions, according to the Department of Labor, far more than the 180,000 increase that economists had been predicting. Average hourly wages rose 0.3 percent, also higher than expected. The unemployment rate remained unchanged at 4.9 percent.

I am going a bit out on a limb here, but I go back to what appears to be some changes in the pattern of hiring and layoffs as the US has shifted from an industrial to a service economy. Ordinarily July is a big layoff month as factories historically shut down for a good part of that month to install new, more productive equipment. In addition, some service entities, including educational facilities, also have reductions in force around that time. But the times they are a-changin’. School facilities are altering their schedules, and factories don’t necessarily have to close for upgrading. Typically, close to one million people leave the work force in July. That gets seasonally-adjusted to a positive number about which we all talk. As I have said, I have never met a seasonally-adjusted person. It will be interesting to see what happens this year with the labor market relatively tight and the patterns changing. This affected the numbers in May and June with May being understated while June more than made up for that understatement. The pattern YTD is about 100,000 short between the seasonally-adjusted numbers and the unadjusted numbers. Let’s see how the job numbers play out in coming months—revised numbers will be released in September. Meanwhile, I think we should pay more attention to the wage numbers, which are rising. Over the year, average hourly earnings have risen by 2.6 percent. Higher wages are a big component of the Fed’s inflation gauge. Both the July employment numbers and higher wages could affect the Fed’s thinking in September.

In the meantime Brexit continues to be newsworthy. Bank of England Governor Mark Carney has taken precautions to ease the potential downside for Britain. In response, instead of punishing the UK, the EU has an opportunity to move toward a more United Europe. It has to take a harder look at what has to be done throughout Europe on the fiscal side and with regard to the debt and negative rates. The question is, will it? I think it has to. Raw democracy may get in the way.

What else?
As I have previously observed, I think the emerging markets with some volatility are where the growth is. India has to fall in that camp. The reform steps are a start. One has to remember that India is the world’s largest democracy. Whether Indian Prime Minister Narendra Modi can navigate his way through this is another question. I think he can, but it will be a volatile road.

As I have said before I find the Americas the most interesting set of markets. They have had quite a run in anticipation of change from Cape Columbia to Tierra del Fuego. Just think if our focus was to make America great in the broadest sense of the definition. We still have long-term issues of growth globally. It will be a slower pace overall, but the opportunities may prove to be broader. Maybe a measure of stability in real assets and some understanding of the value of illiquidity premiums become a focus. So, pay attention to the Americas, all of them.

Our survey shows the role of alternatives in portfolios is likely to increase—But the language needs to change.

We asked Prosek Partners to conduct a survey of a random selection of attendees at our SIC15 held in May. The topic, of course, was the Role of Alternatives in Future Portfolios. 124 of the 649 attendees were asked a series of questions regarding their use of alternatives and some of the issues affecting their decision processes. One has to say that even though this was a random sample of attendees, almost all the attendees were relatively sophisticated institutional and individual investors and advisors, who were there to listen to a variety of observers and analysts of the global markets, economies, and geopolitics. We have commented on some of the observations at the conference, and you will be seeing videos on the Altegris site beginning June 24. These were not novices when it comes to alternative investments. Every attendee interviewed had some participation in alternatives, with different reasons for their use from complements to traditional strategies, substitutes for traditional equity or bond allocations to hedges against volatility.

70% of the advisors, 69% of the private investors and 63% of the institutions expect to have a net increase in their alternative holdings in the second half of 2015. This may reflect the tone of uncertainties expressed by the speakers at the conference regarding where expected market returns may come from and the possible volatility associated with them.  Highest on the list for advisors and private investors are Managed Futures/Global Macro (33%) while institutions put Private Equity (36%) at the top of the list.  Private Equity (25%) and Long/Short Equity (21%) are also high for advisors and private investors while the institutions put Managed futures/Macro (20%) and Long/Short Equity (20%) next on their list. Interestingly, there were also some expected decreases in all categories: Private Equity, Long/Short Equity, Managed Futures/Macro and Alternative Fixed Income with some investors increasing and decreasing the same strategies. I would read into this a fairly active approach to using alternatives in the portfolios with some concerns about the markets in general—in particular, the fixed income markets. This was certainly the anecdotal tone among attendees away from the hard numbers in the survey.

The survey participants were also asked what percent of a portfolio should be in alternatives. 10-25% was the most common range (59%). Interestingly, 15% indicated 25-50% as the range, while 3% indicated the allocation should be above 50%. We have seen certain institutions, endowments in particular, move toward having alternatives as a core of their allocations with more tactical allocations for long only active managers and straight beta plays using ETFs. It is interesting to see suggestions of higher allocations to alternatives coming from advisors and private investors.

Of particular interest to us were a series of questions regarding attributes of importance and concerns in making investments in alternatives. Clarity Regarding Investment Philosophy and Strategy ranked highest (60%) among attributes and second among concerns (24%) with Lack of Education on the Product Offerings (10%) being the third most significant concern. Among concerns, fees (53%, but 80% among Advisors), was the highest. This has been a high concern for the whole time I have been in the industry. And, with some democratization as well as Moore’s Law at work, the universe of strategies that do justify the fees on a net return basis continues to shrink.

Clearly the industry has some work to do explaining the strategies and positioning them appropriately in portfolios. The term “alternatives” may be part of the problem. This is hard for me to say given that it is an integral part of our name. It has come to represent a multitude of strategies within the investment universe and carries with it a tinge of the exotic. Merriam-Webster describes an alternative as: “different from the usual or conventional. Existing or functioning outside the established cultural, social, or economic system.” That makes it a little scary for some—or maybe for most. In truth, most of these alternative strategies are simply investment approaches that carry different degrees of risk, correlation and sometimes, liquidity, within the classic 60/40 stock/bond allocations. Others, such as true managed futures and absolute return strategies, provide uncorrelated return and risk streams to these classic allocations.  The decisions one makes on including such “alternatives” are not too different from deciding how much to allocate between a small-cap growth strategy or large-cap value in equities, or between high yield and investment grade in the bond world. I can remember when a deviation from the center of the classic style boxes was viewed as exotic and “alternative.”  Every strategy carries with it a different risk and return profile, and allocations should adjust according to the specific needs of the investor.  Given an investor’s goals and desired outcomes, it could be that various “alternative” strategies might offer better ways of achieving them. We have a responsibility to add investment clarity to make this a more complete picture as opposed to an exotic one.   The survey provided some surprises, even for us, with some very positive messages given our focus. It also pointed out, even among a sophisticated group of investors, there is work to do. We are Paying Attention.

Messaging and Positioning in a Different Risk and Return World

A conversation about real estate with broader implications

I don’t ordinarily write about specific funds under the Altegris umbrella, but a recent meeting with a gatekeeper and Burland East, who is the fund sub-adviser of the Altegris/AACA Real Estate Long Short Fund (RAAIX) produced some more general observations.

Burl has been involved in the real estate business for over 30 years as an analyst, investment banker, direct investor, public securities investor and an advisor and spokesperson in the industry. As CEO of American Assets Capital Advisers (AACA), he has been managing the current fund since its inception as a hedge fund in 2011 through its conversion to a mutual fund in early January 2014, to the present.

The specific investment approach focuses on owning companies in real estate sectors where the tenant is denied choice, exhibited by:

  • Few sector participants
  • High barriers to entry for new owners/developers
  • High barriers to exit for tenants
  • High secular demand

While these characteristics reflect AACA’s long-bias philosophy, it has the ability to take short positions exhibiting opposite characteristics, with the goal to generate alpha, hedge systematic risks, or hedge the current stage of the real estate market cycle. The fund is currently about 120% long and 20% short—half in interest rate and credit spreads and half in specific equity securities. That number can vary day-to-day and, certainly, over time as we move further along in the real estate and interest rate cycle.

At the meeting, Burl said he believed we were in the fourth inning of the current real estate cycle. The gatekeeper response was a view that we may be further along in the cycle; they already had a number of approved real estate funds, although none that were hedged; and there was a concern that exposure in the sector was already high from chasing yield and performance. My expressed thought was there were two ways to deal with this view: 1) suggest to the system that exposures should be cut back, which is a very specific timing call, or 2) deliver the message by introducing a real estate fund that does take a hedged approach, is definitely not a benchmark hugger, and looks for alpha on both the long and the short side of the market. The message would be that straight beta exposure to the sector may be producing higher risk if we are further along in the cycle (even if just the fourth inning), and shifting real estate assets to a manager who is taking a hedged approach may reduce some of the elements of risk in a long only portfolio. Of course, other risks exist in a non-diversified portfolio and past performance is not indicative of future results. However, if one wishes to introduce a sense that risk may be higher in a specific sector such as real estate, recommending a hedged approach may get that message across more clearly than just saying risks are higher without offering such an alternative.

To a great extent, this is a message we have been delivering regarding all of our alternative strategies from managed futures to long/short fixed income. The end of quantitative easing (“QE”) in the US combined with central bank moves elsewhere in the world has increased equity and credit dispersion among sectors and geographies against a backdrop of more systematic currency and commodity trends. This doesn’t necessarily call for a wholesale shift in broad asset allocations. It does suggest that we are moving into an investment climate where active management and absolute return strategies, including long/short management, could become more the core of portfolios with beta plays being the higher-risk shorter-term moves on the margin. The illiquidity premium may reassert itself as dispersion produces opportunities with longer holding periods a requisite for returns.

I will say again, the past performance we have seen during the period of US QE is not indicative of future returns and future measures of risk. Pay Attention to the specific characteristics of every mandate in your portfolio with an eye on the changing environment as the US moves slowly toward “normalization” while much of the rest of the world plays catch-up.



Altegris Advisors, LLC is a CFTC-registered commodity pool operator, commodity trading advisor, NFA member, and SEC-registered investment adviser. Altegris Advisors sponsors privately offered commodity pools and hedge funds, and advises alternative strategy mutual funds that may pursue investment returns through a combination of managed futures, global macro, long/short equity, long/short fixed income and/or other investment strategies.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Altegris/AACA Real Estate Long Short Fund. This and other important information is contained in the Fund’s Prospectus and the Summary Prospectus, which can be obtained by calling (888) 524-9441. Read the prospectus carefully before investing.

The Altegris/AACA Real Estate Long Short Fund is distributed by Northern Lights Distributors, LLC. Altegris Advisors, AACA and Northern Lights Distributors, LLC are not affiliated.


Equity securities such as those held by the Fund are subject to market risk and loss due to industry and company news or general economic decline. Equity securities of smaller or medium-sized companies are subject to more volatility than larger, more established companies. The concentration in real estate securities entails sector risk and greater sensitivity to overall economic conditions as well as credit risk and interest rate risk.

The Fund will engage in short selling and short position derivative activities, which are considered speculative and involve significant financial risk. Short positions profit from a decline in price so the Fund may incur a loss on a short position if the price increases. The potential for loss in shorting is unlimited. Shorting may also result in higher transaction costs which reduce return. The use of derivatives, such as futures and options involves additional risks such as leverage risk and tracking risk. Long options positions may expire worthless. The use of leverage will cause the Fund to incur additional expenses and can magnify the Fund’s gains or losses.

Foreign investments are subject to additional risks including currency fluctuation, adverse social and economic conditions, political instability, and differing auditing and legal standards. These risks are magnified in emerging markets. Preferred stock and convertible debt securities are subject to credit risk and interest rate risk. As interest rates rise, the value of fixed income securities will typically fall. Credit risk, liquidity risk, and potential for default are heightened for below investment grade or lower quality debt securities, also known as “junk” bonds or “high-yield” securities. Any ETFs held reflect the risks and additional expenses of owning the underlying securities.

Funds that are new have a limited history of operations. Higher portfolio turnover may result in higher costs. The manager or sub-adviser’s judgments about the value and potential appreciation or depreciation of a particular security in which the Fund invests or sells short may prove to be inaccurate and may not produce the desired results. The Fund is non-diversified and may invest more than 5% of total assets in the securities of one or more issuers, so performance may be more sensitive to any single economic, business or regulatory occurrence than a more diversified fund.


Alpha. A measure of performance on a risk-adjusted basis. Alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. Beta. A measure of volatility that reflects the tendency of a security’s returns and how it responds to swings in the markets. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. Long. Buying an asset/security that gives partial ownership to the buyer of the position. Long positions profit from an increase in price. Short. Selling an asset/security that may have been borrowed from a third party with the intention of buying back at a later date. Short positions profit from a decline in price. If a short position increases in price, the potential loss of an uncovered short is unlimited.


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