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By Nadia Papagiannis, CFA | 03-03-2010 03:58 PM

How One Fund Stayed Positive in 2008

Managers AMG First Quadrant Global Alternatives manager Ed Peters on the fund's downturn performance and the role of a true alternative investment in a portfolio.

Nadia Papagiannis: Hi, my name is Nadia Papagiannis. I'm the Alternative Investment Strategist here at Morningstar. Today I'm here with Ed Peters who is Co-Director of Global Macro Research at Managers AMG First Quadrant Global Alternatives Fund. Thanks for being with us here today, Ed.

Ed Peters: Thanks for having me.

Papagiannis: Thank you. So, Ed, your fund uses highly liquid derivatives to take advantage of market inefficiencies in stocks, bonds, and currencies. Your fund help up pretty well in 2008. So what kind of indicators were you looking at? What caused your fund to profit in 2008?

Peters: Well, there were two things. One is, unlike a lot of asset allocation funds, even long/short asset allocation funds like ours, we didn't have a big overweight towards stocks, which happened. Usually, we used a relative valuation measure between stocks and bonds. It's based on a sort of risk premia, a spread in expected return. When that gets wide, equities look good.

What happened in 2008 was that, because of deflation fears and flight to quality fears, a lot of people bought bonds. That drove down bond yields to very low levels. And it made equities look very attractive, based on this one measure alone. But, unfortunately, it didn't take into account the deflationary aspects of what was going on.

So, in this kind of environment, what you need, in a high volatility environment, is you need factors which also factor in sentiment. One of the things we use, for instance, is a volatility factor, one that looks at when volatility is increasing, it basically downgrades the valuation factor.

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