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How to improve the risk/return potential of your portfolio

Downside protection can result in long-term market outperformance.

Alternative mutual funds widen the scope of strategies available to investors beyond long-only investing, providing a broader opportunity set within which to capture returns. As a result of their additional flexibility in using certain investment techniques, many alternative mutual fund strategies target lower correlation with broad market factors compared with long-only investing, which can help during moments of volatility.

Including an allocation to such strategies in a traditional retail portfolio can lead to diversification benefits that could result in an improved risk/return profile  - and help create a smoother ride.

Improved risk/return tradeoff

The chart below outlines the benefits of portfolio diversification, illustrating that adding a modest 15% allocation to market neutral strategies to a traditional 60/40 equity/bond portfolio has historically resulted in an improvement in the risk/return tradeoff over the past 20 years (as represented by the Sharpe ratio of 6.6%).

Note: Illustrative allocation only. The above is not meant as investment advice.

Tip:

Sharpe ratio is a common measure of risk-return trade off. A higher Sharpe ratio indicates a higher return per unit risk, which is good for investors.

 

Fidelity liquid alternatives

Fidelity Global Value Long/Short Fund


A global equity strategy that focuses on value-oriented stocks through a combination of long and short exposures.

Fidelity Long/Short Alternative Fund


A blended “130/30” style product that has a North American equity focus.

Fidelity Market Neutral Alternative Fund


A market neutral fund that aims to achieve absolute returns through a balanced combination of long and short positions.

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