Time to play your 'Get out of Beta free' card

Time to play your ‘Get out of Beta free’ card

Donald Pepper

Co-CEO & Head of Multi-Strategy

Donald Pepper

Co-CEO & Head of Multi-Strategy
Donald joined Trium Capital as Co-CEO in 2017. He took on the role of Head of Multi-Strategy in October 2024, having been on the Multi-Strategy Investment Committee for several years prior to this. He began his career at Goldman Sachs in 1987 in Fixed Income. In 2000, he started to focus on Hedge Funds in Prime Brokerage at Goldman Sachs and Merrill Lynch, where he was Managing Director of Prime Brokerage in EMEA until 2008, when he moved to become Head of Hedge Funds at New Star Asset Management and Henderson Global Investors, His responsibilities included being Co-Portfolio Manager of two Multi-Strategy Hedge Funds. In 2010, Donald moved to TT International as Investment Director before joining Old Mutual Global Investors in 2012 as Managing Director of Alternatives, where he was a member of the Quarterly Investment Committee and the Style Premia Investment Committee. Donald read Philosophy, Politics & Economics at The Queen’s College, Oxford, where he received an MA. He is a CFA Charterholder and holds the CFA Certificate in ESG Investing.
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Equity markets have enjoyed an exhilarating bull market in recent years, exemplified by the S&P 500 being up 57% since Jan 2nd 2023 (to June 26th 2025). This outperformance by equities, and notably by the US market, has generated an embarrassment of riches from a portfolio context. Equity benchmarks, driven by passive Market-Cap Index & ETF flows buying, have left investors with very concentrated exposure.

As investors review their options in mid-2025, what might they consider?

Option 1: 'The music is playing, keep on dancing...'

Investors can decide to “keep dancing while the music is playing”, as Chuck Prince put it in 2007. Unfortunately, this did not end well for Citi, and it did not end well for Mr. Prince. In 2008, the MSCI Europe was down -43.3%. This required equities to be up a whopping +76.3%, just to recover investors’ capital.

In the past decade, however, painful selloffs have been followed by sharp “V-shaped” recoveries. 2022’s S&P 500 decline of -19.4%, even when compounded by a sell-off in ‘safe haven’ Bonds – as Central Banks hiked short-term rates, was short-lived. So too, was the more recent sell-off, between February 19th-April 8th 2025, which took the S&P 500 down -18.9%. The Bond market was again an unreliable friend, particularly the long end. However, the beta tide came quickly in, and investors’ modesty was maintained, as they raised their glasses and cheered “Always buy the dip!”

However, what goes up can go down…a very long way…and stay down!

In the late 1980s Japan was seen as the “exceptional” country that the US is seen as today. The Nikkei 225, propelled by increased global market-cap driven allocations from active Balanced Funds with MSCI World and EAFE mandates, not to mention FOMO buying, rose to a peak, on December 29 1989, of 38,915.87. This level was not to be seen again for 35 years, as the Nikkei 225 spiralled down as much as -80% by March 2003.

Time to play your 'get out of beta free' card v2
Source: Trium Capital

Option 2: What would a 'Prudent Investor' do? Diversify

Investors know they are very over-weight equities, and particularly over-weight US equities. Choosing to not do anything about this is an active decision.

It may be useful to consider what a “Prudent Investor” might contemplate now. The “Prudent Man Rule” comes from an 1830 court case, Harvard College v Amory, which made explicit the requirement for trust fiduciaries to invest assets “as a prudent man would invest his own assets”, considering:

  • The needs of the beneficiaries
  • The need to preserve the estate [preserve capital]
  • The need for income

The rule was updated and codified in the Uniform Prudent Investor Act of 1992, which specifically required that trustees should “diversify the investments of the trust”. Hardly controversial, this is well explained in the old adage: “Don’t put all your eggs in one basket”.

Investors may want to consider realising a portion of their super normal profits to somewhat rebalance their portfolios. For example, an investor could take profits on 20% of their US equities and still be left with 1.25x the exposure they would have deemed prudent back in January 2023.

By many metrics, equity valuations now look stretched. Goldman Sachs recently forecasted a paltry 3% annualised nominal total return for the S&P 500 over the next decade1. Meanwhile, there is no law saying 2022’s negative performance, let alone 2008’s, cannot be repeated.  

What to diversify into?

In 2022, and again in March-April 2025, Bonds have proven to not be the safe haven investors were looking for. Longer-dated Government Bonds have experienced more “Liz Truss” like price movements. CTAs did not help in the recent sell-off. Credit spreads are now trading at almost the tight (expensive) levels last seen in…er…2007.

Meanwhile, the returns on short-dated bonds look paltry. One year US Treasuries are yielding only around 4.0%, UK Gilts around 3.75%, while 1 year French or German bonds yield below 2.0%, at the time of writing. Investors might rightly ask: “Is that the best return I can aspire to in this part of my portfolio?”

There is a viable alternative to equities and bonds

Enter uncorrelated Liquid Alternatives — highly liquid daily dealing UCITS funds that are designed to be uncorrelated to traditional assets, thus shielding portfolios from equity or bond market turmoil, while targeting returns significantly in excess of the cash/the “risk-free” rate available from short-term government bonds.

A return of cash +4% (so around 8.25% in USD and GBP), if achieved, will provide more than double the return available from short-term UK Gilts or US Treasury bonds and triple the return available from French or German government bonds.

As Investors think back to how they felt in the depths of the 2022 sell-off on April 8th, before the “TACO” recovery, Bob Dylan’s line from Like a Rolling Stone: “How does it feel?” may come to mind. That is not the music they will want to hear playing. Should they consider playing their “Get out of [some of your] Beta free” card instead?

 

_____________

 

1 – Source: Goldman Sachs Global Economics Report – 18 October 2024

The author wishes to thank William Peterkin, who undertook additional research for this article whilst interning at Trium Capital.

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