Investors Assuming More Risk For Less Return. Where To From Here?

Over the past 50 years, the US economy has experienced four significant market crashes: Black Monday (1987), the Dotcom bubble (2001), the Global Financial Crisis (2008), and, most recently, the Covid-19 crash (2020). While each of these crashes was triggered by unique factors, they share a common theme—heightened systemic risk and increased market volatility. This trend suggests a growing fragility in global markets, making it harder for traditional strategies to thrive.

The S&P 500 and its diminishing risk-return profile

In a study conducted by Apex Capital Management in June 2024, the average annual return of the S&P 500 has been steadily declining over a 10-year rolling period, while the average annual drawdowns have been increasing both in size and frequency. These shifts indicate that investors are facing a challenging risk-return dynamic, where larger drawdowns have become more frequent without corresponding gains in returns. This is a major concern for investors relying on traditional equity allocations to meet their performance objectives.

One of the most telling indicators of this market stress is the ongoing decline in the 2 and 3-year rolling Calmar ratios. The rolling Calmar ratio compares the annual return of an asset to its maximum drawdown over a 3-year period, effectively showing the reward investors receive for enduring significant losses. Over the past five years, Apex’s analysis has found that the rolling Calmar ratio has averaged 1.0 and 0.9, respectively. This means investors are now forced to accept increasingly severe drawdowns for diminishing returns, a sharp contrast to the more favorable conditions seen before 2000.

These findings paint a troubling picture for those invested heavily in traditional markets. Investors are not only facing larger, more frequent drawdowns but also seeing the risk-return balance skew further against them.

Hedge Funds and Crisis Performance: A Historical Challenge

Hedge funds, once seen as a reliable alternative in turbulent times, have also struggled during periods of market stress. A 2013 paper by Conquest Capital, a quantitative CTA based in New York, entitled "Risk Aversion", highlighted the correlation between hedge fund underperformance and rising economic risk-aversion during crises. Conquest identified five proxies—Credit risk, FX risk, Emerging Market risk, Liquidity risk, and Equity risk—that increase in times of contagion, leading to underperformance across most hedge fund strategies. While hedge funds were able to deliver outsized returns during periods of higher interest rates when equity benchmarks underperformed, they have largely fallen short during major market crashes.

This underperformance of hedge funds during crises has left investors searching for alternative managers with differentiated strategies that can handle periods of heightened volatility.

A New Approach to Volatility and Crisis Management

In a world where S&P 500 returns are no longer asymmetric, and hedge funds are often correlated to underperform during crises, investors are left seeking more innovative approaches. Apex Capital takes a fundamentally different approach by leveraging short-term, quantitative strategies that target Commodity, Equity Index, and FX volatility in a market-neutral fashion. Our approach is not a "black box" solution, but a transparent, technology-driven strategy designed to thrive in volatile markets where traditional managers falter.

Apex’s proprietary risk models and technology-enforced guardrails allow us to capture alpha from distinct market niches while minimising exposure to the downside risk that plagues most investors in times of crisis. By focusing on liquidity and volatility as an asset class, rather than merely reacting to market trends, we position ourselves as a forward-thinking leader in the boutique alternative investments sphere.

In today’s environment of declining interest rates and increasing economic uncertainty, Apex Capital stands apart by offering investors a proven, volatility-based strategy that is designed not just to weather market storms, but to capitalize on them. Our unique approach provides a compelling alternative for those seeking crisis-resistant performance and a consistent, risk-adjusted return profile.

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