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.

Disclaimer
The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses, or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital.

In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives.

Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.

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