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Traditional risk management models can expose investors to heavy losses in
sudden market corrections
F-Squared cautions financial advisors to align investment strategies with client priorities to ensure downside
risk management for portfolios
Wellesley, Mass. – June 12, 2015 – Although U.S. equity markets have experienced one of the longest and
strongest bull markets since the Great Depression, fears of an imminent market correction are also rising. A
recent survey of independent financial advisors, conducted for F-Squared Investments by Pulse Logic1, found
that 74 percent of advisors reported they believe a market correction will occur this year, a 10 percentage
point increase from findings in the first quarter of the year.
In light of this heightened level of concern among advisors and end investors, F-Squared has raised a major
red flag on traditional investment strategies, which the firm’s experts warn are poorly suited to protecting
investor portfolios against potentially heavy losses in the event of a sudden market correction.
“Traditional investment strategies can expose investors to heavy losses in unstable markets because different
asset classes can see dramatic increases in their correlation during these periods, robbing portfolios of their
ability to buffer or hedge sharp declines,” says Dennis Follmer, Head of Portfolio Management at F-Squared
Investments.
Mr. Follmer was commenting following publication of “Volatility Matters: Aligning Investment Priorities to
Protect and Grow Client Wealth,” a paper from F-Squared that highlights the importance of adopting
investment strategies designed to protect portfolios against the risk of severe market declines.
The F-Squared paper states that such traditional strategies often expose investors to asymmetric risk, i.e., a
situation where the potential magnitude or probability of losses is greater than the potential magnitude or
probability of gains. For example, during the 2008 financial crisis markets dropped 57 percent from peak to
trough. While this was a devastating loss, the 132 percent return subsequently needed to recover those losses
was even more daunting.
The F-Squared paper goes on to outline how, while generally well-constructed and accurate, many common
investment risk management models become highly inaccurate during times of elevated market stress. Yet it
is precisely during times of heavy turbulence that risk models need to be most effective.
“Clients want to protect their portfolios, and one of the greatest threats they see is a severe market decline,”
said Mr. Follmer. “Small losses can be comparatively tolerable; but large market declines are exponentially
more painful. They can delay retirements, devastate college savings plans, and make investors feel they can no
Survey conducted by Pulse Logic, May 2015. Advisors’ primary affiliations included independent broker dealers,
national wirehouse broker dealers, regional wirehouse broker dealers, and registered investment advisors. Online
survey invitations were sent to over 8,000 advisors, and 219 qualified advisors completed the survey. The
distribution was fairly even over primary affiliations.
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longer afford to take the risk of equity market investing. That’s why at F-Squared we have designed a suite of
products that fundamentally redefine risk management in order to better protect clients from severe losses in
down markets while providing quality participation in rising markets.”
The paper describes how modern portfolio management strategies can expose investors to large, rapid losses
during periods of substantial market volatility. Exacerbating the dangers of these situations is the tendency
for sharp market declines to be followed by slow, gradual recoveries.
Given that a loss has a greater impact than a similarly sized gain, and takes much longer to recover, successful
wealth management is more about limiting losses than realizing gains.
Speaking on this point, Sharon French, F-Squared’s Chief Distribution Officer, said “Since our foundation, our
mission at F-Squared has always been to align our strategies with the true needs of the end investor, which is
why we believe the priority of advisors must be to protect their clients from downside risk at this volatile time
in the capital markets.”
Please click the link to read F-Squared’s paper “Volatility Matters: Aligning Investment Priorities to Protect
and Grow Client Wealth” in its entirety.
View a short video of Dennis Follmer discussing F-Squared’s investment objectives in his own words.
Read the F-Squared white paper on Volatility Regimes here.
For additional resources that demonstrate the power of F-Squared’s strategies surrounding market volatility,
please visit the Volatility Hub at f-squaredinvestments.com/volatility.
About F-Squared Investments
F-Squared Investments is a manufacturer of next-generation investment indexes based on its
AlphaSector® capabilities. F-Squared seeks to deliver repeatable investment processes and solutions to help
meet the financial goals of real investors. The firm's core values center on striving to protect investors from
significant down markets by actively de-risking, while participating in rising markets. F-Squared serves
clients in the advisor, institutional, retail and retirement markets. As of March 31, 2015, F-Squared affiliated
entities had over $16 billion in fee-generating assets. F-Squared Investments is based in Wellesley MA and
Ewing NJ. www.f-squaredinvestments.com
F-Squared Investments claims compliance with the CFA Institute Asset Manager Code of Professional Conduct.
This claim has not been verified by the CFA Institute.
IMPORTANT INFORMATION
The views expressed in the referenced materials are subject to change based on market and other conditions. These documents may contain certain statements
that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or
developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not
be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to
buy or sell securities.
Risk Disclosure
“AlphaSector®” is a registered trademark of F-Squared Investments, Inc. and is used with permission. No investment strategy or risk management technique
can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. F-Squared
Investments is not offering or rendering investment or financial planning advice through this material, which is limited to the dissemination of general
information about the Adviser's services.
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