Finding Alpha in Every Market Condition: Altegris' Jon Sundt Talks Alternative Investment Strategies

Joel Anderson  |

Finding smart investing strategies when times are good and the markets are soaring isn’t terribly hard. A year when the S&P 500 climbs over 30 percent, as it did last year, has a way of making stock pickers look pretty smart. However, what about when times are bad? Does your fund manager know how to extract the most possible value out of all scenarios, not just the bull markets?

That’s the driving idea behind alternative investment managers Altegris. While most mutual funds rely solely on long-only stock and bond funds, Altegris offers the opportunity to invest with fund managers who aren’t limited in the tools they can pull out of their kit to get you alpha. sat down with Jon Sundt, Altegris’ co-founder and CEO, at the Strategic Investment Conference (SIC) 2014, held in San Diego from May 13-16, to talk about his funds, his fund managers, and why long/short strategies may offer investors better opportunities than more-traditional offerings.

EQ: How would you say the conference went?

Jon Sundt: Fantastic. Five hundred people in attendance, a world class line up of speakers, various thought leaders, and some challenging views getting presented. It’s been a big success.

EQ: Who are some of the speakers you found most interesting?

Jon Sundt: I think Jeffrey Gundlach is always compelling in terms of his view on credit. I particularly enjoyed David Zervos and Kyle Bass as well.

EQ: The stock market appears to be undergoing a correction last two months especially in the NASDAQ a lot of website action but generally down, how do you see developments in the global economy effecting or not effecting American Equities specifically?

Jon Sundt: There certainly appears to be a decoupling from emerging markets, which is obvious from the fact that the developed countries and the emerging markets have diverged in terms of the rate of returns.

More specifically in U.S. equities, you’ve seen this multiple expansion that’s driven the stock market the last several years. You’ve seen a five-year run off the lows and a lot of beta in the market, but you’ll notice that, over the last 6 months, some of these high flying stocks that have high P/E multiples have been undergoing a correction. A dramatic correction.

So I think it’s becoming more of a stock pickers market, not a market that you can just replicate by being in an index fund. Stock selection as measured by dispersion and correlations is now becoming more important. You can still build the argument that there are stocks that are going to go up. You’ve got an accommodating fed policy that looks like it will continue to provide a wind at the back of equities, but I think stock selection is key now.

This is where alternatives come in, because you’ve got fund managers that aren’t tied to benchmark. They can dramatically shift and reduce their exposures accordingly, shift and reduce their net long exposure, take concentrated bets, and, probably most importantly, they can hedge, so they can use shorts.

EQ: What sort of global developments do you think American investors should be paying the most attention to?

Jon Sundt: The biggest driver right now, of course, is the Central Bank policies. We’ve been told that they’re ending QE but we don’t have a lot of clarity on what that looks like. I think that’s the overarching risk: what’s the Fed’s policy stance moving forward?

Look, there’s exogenous risk you’ll never know about pre-event. Certainly you can point to Syria, China, the Ukraine, map out some areas that could shutter the markets, but I think the long-term growth prospects of U.S. equities are more of a local story driven by the U.S. economy and the Central Bank.

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EQ: Your funds employ alternative investment strategies that aren’t necessarily in the tool kit for other mutual funds. What would you want to tell our readers about some of these strategies and why they set your products apart?

Jon Sundt: You currently have an environment where equities are at time highs, on a five-year run, and interest rates are at 30-year lows. So, if you approach the market today with fresh capital, let’s say a 60/40 stock-bond blend, do your really want to place 60 percent of your capital in equity, long only, and 40 percent in bonds, long only, given the fact that equities are all-time highs and interest rates are at all-time lows? Does that makes sense right now?

So when you start to question that, you start asking yourself “gee, am I stepping in front of a potential correction or a sideways market or a market that doesn’t have as much wind at its back or a potentially rising-rate environment?” And you have to then ask, “can I get with managers that have the ability to make money in those environments?”

That leads you to the doorstep of long/short equity managers. Because long/short equity manages don’t need a rising market to make money, and if there’s a market correction they typically do a better job of hedging.

Two strategies that you can find in our mutual funds are long/short equities and long/short credit. You can approach the market and say “Look, I want to be exposed to the equities market, but I want a manager that has the mandate to be able to pull out, go to the sidelines, hedge, or manage risk through shorting the market.” So that’s a long/short equity manager, and we build products around those type of managers.

On the credit side, you want somebody that has demonstrated the ability to make money in a rising-rate environment. Or have perhaps they have a short-duration or a negative-duration in their book to manage around rising rates. So we build our long/short fixed income fund as a product that can do just that. It’s been up for over a year now, the top performing fund in the MorningStar non-traditional bond category over the last year despite some bumps in the road in terms of interest rates.

So I think it’s just prudent for an investor to take part of his portfolio and move it to a talented manager that’s demonstrated the ability historically to make good money. You want a manager who has a five- or ten-year track record in up and down markets. You want to see if they did well during 2008, if it’s a manager that has a long track record. And that’s what we do.

EQ: That’s actually a great segue into our last question. What do you look for when you’re fund managers to Altegris? What goes into your thought process in trying to find the people that you want to put in charge of these funds that deal in alternative investments?

Jon Sundt: We look for people with the right pedigree, the right process, and the right performance over time.

We want to see people that have gray hairs, they’ve been in the business for a while. We want to see people that have a pedigree, have demonstrated the ability to extract alpha. We want to see a process that’s repeatable. With a hundred traders in a room, two or even ten are going to shine that have no skill. We want them to be able to articulate a process that gives us the belief that they’re going to continue to provide an edge over time.

And then we want performance, we want to see it demonstrated by the performance of their book. We want to see lot of good singles and doubles, not one or two homeruns. It’s like looking at a player’s batting average, you want to see 300 at bats, not 20.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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