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Could Eddie Murphy and Orange Juice Be Affecting Your Portfolio?

Justin Lent | May 10

There are two elements to being a successful investor. The first is obvious, taking a sum of money and growing it. The second element is not. It is the other side of the growing money coin, namely not losing it once you’ve made it. The relationship between making money and not losing it is called the capture ratio, and it’s a crucial but often overlooked metric to analyze investment performance.

The illustration of this principle is simple. Take a standard S&P 500 Index fund. The best part about the fund: investors get nearly all the upside when the market performs well minus, of course, fees charged by the fund. The issue though, is that when the index is down, investors also experience the totality of the downside.

When optimizing for capture ratio, something remarkable happens. Investors do lose out on some of the upside, but the real power of the approach comes from minimizing losses. This dynamic of attaining greater upside than down is called asymmetrical capture. As we show below, portfolios that achieve asymmetrical capture have the potential to outperform their index-only counterparts over time.
These charts are an example of the superior performance and lower risk achieved by asymetrical capture in two scenarios vs. S&P. Source: Bloomberg

The hard thing about asymmetrical capture is that by forgoing upside, it goes against the core of investing culture. Think about Eddie Murphy’s character Billy Ray in Trading Places. Did Billy Ray limit upside when cornering the market on frozen orange juice? Heck no! Add to that the multitude of other great real-life investment stories, and we wind up here. People regularly searching for “alpha” are potentially leaving billions of dollars on the table while the relative volume of searches for capture ratios does not even register.
This chart contrasts the volume of searches for "alpha" and "capture ratio" in the finance sector in the United States. To examine the chart click here . Source: Google

Generating asymmetry is foundational to StratiFi’s investment strategies. However, we have an innovation that short circuits our instinct to say no to asymmetry because of that inherent upside limitation. Our proprietary strategies work to limit the degree to which an investor must sacrifice upside, while aiming to provide the downside protection that is essential to asymmetrical capture. Or to put it in terms of Billy Ray, we give our investors the chance to have their frozen concentrated orange juice and drink it too.

To learn more about how to implement StratiFi for your clients, please visit here to schedule a demo.

To learn more about the truth behind asset correlations and volatility, click here for our complimentary eBook "The Five Myths that Put Portfolios at Risk: Revealing the truth and improving investment outcomes using options."