Absolute Return Strategies in Bull Markets
June 29th, 2008 by Buck Woodford
There are occasions — sometimes years — when stock markets are so unrelentingly strong that a good active manager who was previously known to be “prudent” becomes viewed as a laggard. This most often happens near major tops in the stock market. Teresa Lo of PowerSwings.com discussed just such situations in a very interesting piece last year. I certainly felt similar pressures from clients and prospects while the indexes romped from mid-2006 to mid-2007.
At Teewinot, we’ve always contended that managers need to be judged for their performance over a reasonable period of time: encompassing up, down, and sideways markets.
True risk management is a definite hindrance to performance in persistent, strong bull runs. That is a fact. During those times — in hindsight — you do undoubtedly do best by just staying long (even better, adding leverage).
However, when the Bull is taken to its knees, legit risk management exactly what portfolios need. It’s not just what you make during the uptrend that counts. It’s what you keep.
