What is the purpose of the Tactical Strategy?

The McAlvany Wealth Management (MWM) Tactical Short is designed to generate positive returns from downside volatility within the equities market. The strategy is not intended to necessarily hedge on equity portfolio dollar for dollar, but will instead strive to opportunistically capture gains as particular stocks and/or sectors decline in value. The objective of our short offering is to provide a mechanism for reducing a client’s overall investment portfolio risk profile while providing downside protection during periods of market instability.

Disclaimer: Advisory services are offered by McAlvany Wealth Management, an investment adviser registered with the U.S. Securities and Exchange Commission.  The comments made in this video discuss economic and market trends and are not intended as advice for any particular investor.  A short selling strategy involves a substantial degree of risk. Any decision to engage in a short selling strategy should be reviewed with your financial adviser.  Past performance is no guarantee of future results. 

 

FREQUENTLY ASKED QUESTIONS: 

What is the purpose of the Tactical Short?
The McAlvany Wealth Management (MWM) Tactical Short is designed to generate positive returns from downside volatility within the equities market.  The strategy is not intended to necessarily hedge an equity portfolio dollar for dollar, but will instead strive to opportunistically capture gains as particular stocks and/or sectors decline in value. The objective of our short offering is to provide a mechanism for reducing a client’s overall investment portfolio risk profile while providing downside protection during periods of market instability.

The Tactical Short is described as non-correlated instead of consistently negatively correlated.  Can you explain?
A constant negative correlation would imply always being positioned fully short, thereby reflecting the direct inverse returns of the asset mirrored.  Such approaches are indifferent to risk.  It is fundamental to our strategy to be selective and willing to wait for more favorable market conditions and compelling opportunities.  Our focus on risk versus reward metrics dictates that there will be periods when we will be minimally short.  Our decision-making process is driven by intensive analysis of a mosaic of indicators, from both “top down” and “bottom up” perspectives.  Depending on our analysis of the backdrop, we will have the flexibility to position either opportunistically or defensively – to expand short exposures in favorable backdrops or significantly reduce exposure to mitigate losses during highly unfavorable environments for shorting.  Positioning the strategy as “non-correlated” is consistent with the objective of avoiding the type of heavy losses suffered by negatively correlated funds during bullish periods.

Is this a fund with pooled assets, or will investors have separately managed accounts (SMA)?
We have chosen to structure the Tactical Short offering in separately managed accounts to allow for advantageous investor transparency, liquidity and, on occasion, some tailoring to better suit the needs of an institutional or individual investment mandate.

What kind of accounts can be opened?
While the Tactical Short offering was developed with the discerning institutional investor in mind, it may be appropriate for individual, trusts or corporate accounts.

Can I transfer a retirement account?
That’s not possible.  The nature of shorting requires that securities be borrowed prior to consummating a short sale.  Regulations mandate a margin account for such strategies, and margin accounts are prohibited for qualified plans (IRA’s and other retirement vehicles).

Is positioning a portfolio to benefit from declines and volatility the only investment style MWM offers?
Definitely not.  While MWM specializes in alternative asset investment management, we do offer traditional portfolio management along with our natural resource and long/short strategies. Tactical Short is a unique offering intended to compliment other risk asset allocations held with MWM or elsewhere.

What do you see as an appropriate percentage allocation to something like the Tactical Short from an overall portfolio mix perspective?
An allocation to our non-correlated Tactical Short adds value by reducing overall investment portfolio downside risk. We would suggest exposure to the Tactical Short in the range of between 5 and 20% of risk assets to help reduce overall portfolio volatility, enhance liquidity and provide meaningful downside protection.  For example: $2,000,000 in total equities and risk asset exposure would typically benefit from a $100,000 to $400,000 Tactical Short allocation.  With an allocation above 20%, we would assume that an investor has chosen our product to place a directional bet on a declining market.

Are there Minimum account sizes?
Institutional investors would generally have a minimum account size of $1,000,000 while, where appropriate, qualified individual investors would be considered with minimum account sizes at inception as low as $100,000.

What are management fees for Tactical Short?
1.0% per year paid quarterly in advance (25 bps per quarter).

If I am utilizing margin in the Tactical Short, will my account be charged for margin borrowing expenses? Are there other expenses I should be aware of?
While the portfolio manager seeks to minimize such costs, there are typically expenses associated with borrowing securities.  Borrowing costs are generally small, with the exception of hard-to-borrow securities. Traditionally, borrowing costs were offset by the return on an account’s cash collateral.

Why would I choose a MWM Tactical non-correlated account instead of a short ETF or options strategy?
We believe our strategy is superior to competing “bear” products and instruments.  Being fully short all the time simply doesn’t work.  Options strategies are risky and tough to execute successfully.  In our eyes, risk management is paramount.  The key to success on the short-side is having the flexibility to navigate through various market environments.  To do so successfully demands a disciplined investment process coupled with a sound analytical framework.  Importantly, there’s no substitute for experienced active-management on the short-side.  In our view, our new offering incorporates the most seasoned portfolio manager with the most compelling analytical perspective, investment process and philosophy available in the marketplace.

Does MWM custody assets? If not, who is the custodian?
We do not custody assets.  Our preference is to retain the services of a preeminent third-party custodian, an arrangement that facilitates online access to account holdings and myriad amenities common to a brokerage account.  Tactical Short client assets are held at National Financial Services, otherwise known as Fidelity.

Can I send additional funds to my account in the future?
Sure.  Additional funds can be added in any quantity.  Because Tactical Short accounts can be rebalanced daily, there should be minimal delay in adjusting positions sizes to incorporate flows into (or out of) your account.

Will this offering be closed at some point to new money?
We do not at this time anticipate capacity issues that would cause us to close the Tactical Short to new investors or restrict inflows.

Do I need to reserve a place?
That’s not necessary.  We would, however, highly recommend funding an account and then to allow us to determine the appropriate time to allocate assets. This is much preferred to beginning the process in the middle of unstable market conditions.

Are assets always invested on the short side?
No, there will likely be periods when we choose not to hold short exposure.  Our analytical framework and proprietary indicators assist us in gauging both when conditions are more favorable for shorting along with the most attractive composition of short exposures (i.e. stocks, sectors, the market, etc.) from a risk versus reward perspective. When conditions are expected to be unfavorable, the Tactical Short is content to watch from the sidelines (sitting in cash and avoiding short exposures).  Such a tactical pivot from being opportunistically short to defensively positioned creates the flexibility necessary to capture gains and then safeguard them from major market advances.

If Tactical Short operates with hedge fund-like versatility, why not charge the standard “2/20” (2% management fee and 20% of profits)?For one, we do not share the typical hedge fund mindset.  By keeping fees to a minimum, we endeavor to develop long-term partner relationships with our investors as we together navigate through the vagaries of market cycles. We did not develop our new product with the intention of getting rich from the next market downturn or financial crisis.  We were motivated by what we saw as a glaring lack of quality flexible short-side products – the type of strategy that savvy investors could live with comfortably during these uncertain and unsettling times.

When you are not short how are funds allocated?
It’s a little confusing.  Unlike long investing, cash is not used up in the process of borrowing and selling securities short.  Whether fully short or not short at all, account assets remain mostly in Treasuries and/or cash-equivalents.  Some of the cash holdings are used as collateral against short positions, but this cash remains in the account.  So even in periods of market stress, Tactical Short assets should remain safe and highly liquid.

How liquid are the funds in my account?
Funds are generally available same day. One of the benefits of a separately managed account is that requests for same-day liquidity can be accommodated.  Short positions will also be highly liquid.  In the event an account is liquidated, it will be possible to unwind (“cover”) short positions upon request and return cash collateral on a standard T+3 settlement basis.  No “gates” here.

Can I add money to an account in the future?
Yes.  There is a minimum to open an account but should you desire to increase your allocation to the tactical non-correlated theme you may do so at any time.

If future gains boost the size of my account, would you recommend allowing my short allocation to increase over time or instead employing a total portfolio re-balancing approach?
Having access to liquidity at market bottoms can be highly advantageous to value-conscious investors.   We’re going into our new venture with the assumption that Tactical Short’s ability to create liquidity in down markets creates an enticing long term value proposition for astute investors.  While tactical decision-making will be a primary management focus of our short offering, we fully expect our long-term investors to engage in cyclical allocation decisions consistent with their individual goals and circumstances.  As partners, we’re committed to doing our very best in offering valuable insight as well as attractive investment alternatives to best serve our investors as they strive to generate and preserve wealth.

Don’ts
  • Don’t be risk indifferent – unwise to maintain 100% short exposure all the time
  • Don’t disregard the macro backdrop
  • Don’t ignore the market
  • Don’t disregard portfolio beta
  • Don’t pretend long/short strategy mitigates risk
  • Don’t only short stocks
  • Don’t maintain concentrated short positions
  • Don’t only short a market index
  • Don’t have illiquid positions
  • Don’t rely on potentially problematic third-party derivatives
  • Don’t invest short collateral in potentially risky and illiquid instruments
  • Don’t be a “one-trick pony” – (i.e. company research, index or quantitative focus)

Do’s

  • Daily intensive, disciplined risk-management focus
  • Wisely adjust exposures based on market risk vs. reward backdrop
  • Be flexible and opportunistic with individual short positions and overall exposure
  • Incorporate experienced top-down macro research and analysis
  • Search for opportunities rather than fight the market
  • Intensive beta management: 
    • Protect against short squeezes and “upside beta” issues 
    • Guard against high market correlations
  • Have as many tools in the toolbox as possible: 
    • Short stocks, sectors, indices, various asset-classes, global perspective,
    • Liquid put options
  •  Incorporate a technical analysis overlay with risk management focus
  • Protect against potential systemic risks: 
    • Avoid third-party derivatives 
    • Liquid put options
    • Vigilant cash and liquidity management
  • Incorporate the best of micro, macro and technical analysis