What is Unconstrained Investing?
Let me explain to you what unconstrained investing really means. It's an investment style where a fund or portfolio manager doesn't have to stick to a specific benchmark. This approach lets managers chase returns across various asset classes and sectors without those restrictions.
Key Takeaways
You should know that unconstrained investing lets fund managers follow investment themes and ideas without being linked to a benchmark like the S&P 500 Index. This gives them the flexibility to respond quickly to market changes. But remember, it also ramps up the risk from the investment manager, as more independent operations could lead to bad decisions that damage the portfolio.
Understanding Unconstrained Investing
Unconstrained investing became more prominent partly because of the distrust after the 2007-2008 Financial Crisis. Investors grew wary of the market and benchmarks like the S&P 500 or Russell 2000. In investing, finance professionals use these benchmarks to check if portfolios are performing as expected.
Typically, fund and portfolio managers followed strict guidelines and measured performance against fixed benchmarks. This lack of flexibility meant they couldn't always capitalize on market shifts in time. It also kept them heavily invested in the U.S. market, which was vulnerable to the subprime mortgage crisis that disrupted everything when it exploded.
Unconstrained Investing as an Alternative Style
With unconstrained investing, the focus is on long-term performance rather than short-term gains, and it avoids the limitations of benchmark tracking.
Take fixed-income investing as an example: managers aren't bound to specific bond ratings, currencies, or sectors, and these rules might only apply to parts of the portfolio. They can use derivatives to hedge against price and rate fluctuations, or even to bet against the market using throughput and call options.
This setup can heighten investment manager risk, especially if inexperienced managers without guidelines or those working independently make poor choices that hurt the portfolio's value. Managers must grasp how different asset classes, sectors, geographies, and governments influence performance.
That said, there are still internal performance metrics and controls to manage risks. The key difference is that a common market benchmark isn't the primary focus of those metrics.
Access to Unconstrained Investing Styles
Some teams create their own unconstrained investing styles, but established asset managers like J.P. Morgan offer these strategies that accredited and high-net-worth individuals can invest in.
On its website, J.P. Morgan explains how its managers in unconstrained strategies research and develop their top ideas across a broad range of asset classes, security types, and sectors. You can think of unconstrained investing as a multi-sector, multi-asset, global approach.
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