2019 proved to be another difficult year for Market Neutral products. Allocators once again started to ask the tragically familiar question “why bother with Market Neutral at all?” We use the term “tragically familiar” due to the simple fact that the client pressure on allocators to follow the crowd is often most dramatic at exactly the worst moments.1 In the pages that follow we take a hard look at markets and allocator decision sets and suggest that, notwithstanding current headwinds, market neutral strategies are one of the last contrarian trades extant. We believe the value of market neutral products now may be greater today than at any time in history other than the peak of the internet bubble.

Figure 1 below is an updated reprint of Warren Buffett’s favorite valuation metric. We rather naively assumed that market participants had learned from the disaster that followed the post 2000 peak. Unfortunately, that assumption has to date been proven wrong as valuations today sit at the 99th percentile of their historical average. Only at the peak of the internet bubble have equities ever been this expensive.

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