No one can forecast the precise timing, nature or impact of an exogenous shock. But these shocks are important because of their viral properties. Examples include:

  • Dominos falling icon
    Financial contagions disrupt an economy.
  • Globe with health sheild icon
    Global pandemics threaten health, safety and mobility.
  • Falling bar chart icon
    Stock market crashes prevent people from using savings.
  • Crops and oil icon
    Commodity shortages lead to price shocks.
  • Terrorist icon
    Terrorist attacks jeopardize urban functioning.
  • Infected Computer icon
    Cyberattacks disrupt vital infrastructure.
  • People protesting icon
    Social unrest threatens groups or institutions.

Three elements combine to defend capital during exogenous shocks.

Behavioural Strategy

In most crises, fear and uncertainty cause people to delay optional purchases while continuing to buy necessities. This is instinctive. The Fund pairs a leveraged position in Consumer Staples for safety, with a short position in Consumer Discretionary, which is cyclical.

Specialty Assets

These often rise together in exogenous shocks when equities fall, while during normal periods, they are effective diversifiers.

  • Gold is a potentially powerful crisis hedge and a ‘hard’ asset.
  • The Volatility Index typically rises significantly when the S&P falls.
  • U.S. Treasuries often benefit from a flight to quality.

Tactical Equity

A solution must have the ability to perform outside of crisis, under normal conditions. This element combines U.S. indexes, industry sectors and defensive factors, such as quality or value, to do so.

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