Strategies

Risk management. These are the first and last words of any sound investment strategy. Risk management is controlled exposure to desired risks and minimization of undesired risk in an investment strategy. Our philosophy is that this is a process without end. Risk management encompasses many disciplines,
from engineering to human resources, from operations to portfolio management, from scientific acumen to old fashioned horse sense. Risk management is a rich discipline and esoteric art at the same time. For those reasons Trinary Capital sees itself as a perpetual student of the markets. We believe this perspective that sets us apart. Our approach to risk management is a philosophy. That philosophy is at the foundation of our Investment Strategy.

Trinary Capital’s metaphor for risk management and, in turn, investment strategy is best encapsulated in Figure 1. The list of risk management examples goes on ad astra. There were mechanical failures such as the brake not having a dead man switch. There were other failures such as the actual break not working. There were human failures such as the numerous men running the train being preoccupied. There were planning failures such as the station managers not having an explicit contingency for there. There were engineering failures such as not providing a crash buffer at the station for trains literally out of control. College students studying this mishap can write essays on all the failures; this is the lesson in academic risk management because it does cut across so many disciplines.

The metaphor of risk management is more subtle than this. Consider that the only death was a passerby on the street below. Imagine that the victim had perfect foresight and knew his death would come about by train. Assuming that this is a rational person we would have to believe that that individual would take every kind of precaution to avoid trains. Don’t ride trains. Don’t go to train stations. Stay away from railroad tracks, etc. That would be his own personal risk management. Despite all these risk mitigation procedures, despite perfect data, despite a perfect forecasting model, despite everything the unthinkable came true. That is risk management. Risk management shouldn’t and doesn’t stop. It is an unending endeavor.

Trinary Capital believes that risk management is the foundation of portfolio strategy. A single good outcome can always happen by luck, but a successful investment strategy is an approach without a horizon. It takes computers with the right equations and people with the right judgement in successful combination.

Tactical Asset Allocation Portfolios

Trinary Capital uses a variety of Tactical Asset Allocation Portfolios to help investors achieve their goals (Figure 1) with diversification among and within asset classes. The division at the highest level (stocks, bonds, and alternatives) reflects Trinary Capital’s forward thinking on the relative value between the asset classes as well as forward expectations. The inclusion of alternatives sets Trinary Capital apart from most other firms because many other firms lack the acumen and thought leadership around them. Trinary Capital has an approach grounded in research and practice and we believe alternatives are not just for institutions and high net worth clients - it is a tool that can be accessible to most investors as alternatives can help with diversification. Given an investor’s goals and risk tolerance, alternatives can be an important part of a portfolio discipline just as much as stocks and bonds.

Selecting a Portfolio

Portfolio selection is determined not only by the goal horizon but also by the risk tolerance of an investor. Risk tolerance is not a physically observable thing - it can only be measured indirectly through responses. Trinary Capital believes that risk tolerance can be sampled through the right kind of risk questionnaire or conversation between an advisor and investor. This is not a static determinant and must be measured over time for any investor. This can mean re-taking risk questionnaires or ongoing dialogue with an investor. Trinary Capital believes there are a variety of ways to get an idea of investor's risk tolerance, but a good place to start may be historical drawdown analysis (Figure 2). These bars give the maximum/minimum portfolio returns over a variety of timeframes. "The Upside takes care of itself" is an industry axiom and pragmatic altruism, so we will omit a discussion of that and include it only for the sake of completeness. That being said, we believe that the worst 1-year drawdowns can tell a story. The data in this figure are historical only and there is no guarantee that the results persist into the future. However, we encourage each investor to get his/her own view on whether the maximum 1-Year loss numbers are bearable. Before selecting any portfolio, it may be a good idea to get a handle of the worst 1-year losses in order to set expectations. We are not in control of the market just as we are not in control of the seas, but we believe that a good portfolio discipline is just like a good ship that can help investors reach their goal and/or destination.

The Proliferation of Alternatives

Available Portfolios

Preservation

The Trinary Capital Preservation Portfolio with Liquid Alternatives is a diversified portfolio derived from a Betagoverned asset management strategy. This portfolio strives to provide income consistent with the preservation of existing capital consisting of a basket of Exchange Traded Funds (ETFs) containing long and short equity strategies designed to minimize downside exposure while maximizing stability and consistency. Market drawdowns are minimized through the inclusion of liquid alternatives and investments with minimal correlation to the stock market. This provides a "shock absorbing" effect, lessening the portfolio's exposure to high amplitude market swings. The risks of this portfolio includes the risk that its returns will trail those of a market benchmark over a given period of time. Investors with significant capital who desire a long-term portfolio to maintain value and minimize downside risk should consider this portfolio. Investors with a very low risk tolerance should use this portfolio.

Conservative

The Trinary Capital Conservative Portfolio with Liquid Alternatives is a diversified portfolio derived from a neutral Beta-governed asset management strategy. This portfolio strives to provide additional growth to income consistent with the preservation of existing capital. Similar to the Preservation portfolio, the Conservative portfolio consists of a basket of Exchange Traded Funds (ETFs) containing long and short equity strategies designed to reduce downside exposure while balancing stability and consistency with investment growth. Market drawdowns are reduced through the inclusion of liquid alternatives, investments with minimal correlation to the stock market. This provides a "shock absorbing" effect, lessening the portfolio's exposure to high volatility market swings. The risks of this portfolio includes the risk that returns will trail those of a market benchmark in exchange for decreased downside risk and exposure over a given period of time; and that drawdowns could exceed those of a market benchmark over a given period of time. Investors who value low risk but desire capital appreciation and returns beyond those necessary to preserve capital should consider this portfolio.

Moderate

The Trinary Capital Moderate Portfolio with Liquid Alternatives is a diversified portfolio derived from a Betagoverned asset management strategy. This portfolio's goal is to provide return similar with the stock market at a decreased exposure to downside risk. This portfolio consists of a basket of Exchange Traded Funds (ETFs) containing strategically chosen equity strategies which reduce downside risk without the equivalent reduction of return. Liquid Alternatives play a large role in this process insulating against market fluctuations, through uncorrelated returns. The risks of this portfolio include the risk that drawdowns could match or exceed those of a market benchmark over a given period of time and that returns may trail a market benchmark over a given period of time. Investors looking for near market correlation with reduced downside risk should consider this portfolio.

Balanced

The Trinary Capital Balanced Portfolio with Liquid Alternatives is a diversified portfolio derived from a neutral Beta-governed asset management strategy. This portfolio's goal is to provide the investor a balanced mix of downside risk and potential upside return beyond a conservative or preservative strategy. This portfolio consists of a basket of Exchange Traded Funds (ETFs) containing strategically chosen equity allocations to offset downside risk with equivalent upside return. Liquid Alternatives additionally assist this portfolio in retaining its balance via returns uncorrelated to the market benchmark, effectively reducing large swings from an environment of increased market volatility. The risks of this portfolio include the risk that drawdowns could match or exceed those of the market benchmark over a given period of time and that returns may trail the market benchmark. Investors looking for a balanced mix of upside potential and downside risk should consider this portfolio.

Growth

The Trinary Capital Growth Portfolio with Liquid Alternatives is a diversified portfolio derived from an increased market performance-governed asset management strategy. The goal of this portfolio is to provide an investor with returns similar to or exceeding the market benchmark return in exchange for downside risk protection against market corrections of the benchmark. This portfolio consists of a basket of Exchange Traded Funds (ETFs) incorporating a diverse mix of LargeCap, MidCap, and SmallCap, and thematic equities including cryptocurrency exposure engineered to balance each other and provide dividend growth designed to match or exceed the market benchmark. The inclusion of Liquid Alternatives as a downside protection layer provides insurance against market volatility caused by the broad exposure to more risky assets. Further, doing this promotes increased upside potential without an equivalent increase in the portfolio downside risk as would be experienced in the benchmark, by providing uncorrelated returns in times of market turbulence. The risks of this portfolio include the risk that drawdowns could exceed those of the market benchmark over a given period of time and that returns may trail the market benchmark. Investors looking for near-market returns with a longer investment horizon and willing to take market-commensurate risk in exchange for increased upside potential should consider this portfolio.

Aggressive

The Trinary Capital Aggressive Portfolio is a diversified portfolio derived from a proprietary Beta-governed asset management strategy engineered to provide maximum returns in exchange for increased downside risk. This portfolio consists of a basket of Exchange Traded Funds (ETFs) incorporating a diverse mix of LargeCap, MidCap, and SmallCap, and thematic equities including cryptocurrency exposure engineered to balance each other while providing dividend growth designed to match or exceed the market benchmark. The portfolio is higher risk. Investors in this theme should be prepared for some fluctuations in exchange for the potential for upside capture in the form of increased returns. This fund has extensive exposure to the stock market domestically and internationally and is assessed to fluctuate responsibly in-line with market fluctuations. The risks of this portfolio include the risk that drawdowns could match or exceed those of a market benchmark over a given period of time and that returns may trail a market benchmark. Investors with a longer investment horizon and willing to take on additional downside risk for increased upside potential should consider this portfolio.

Trinary Capital Income Model with Alternatives

The 40/60 portfolio (40% equities, 60% fixed income) has been a workhouse of spending models in investment management for decades. Variations of it have existed: some with a focus on specific types of equities; some with a focus on specific type of fixed income; and others with both. The amount of granularity below within those categories is infinitely divisible. Performance, of course, will also vary with those choices, some to the portfolio's detriment. Given the current state of the market and the plethora of options that are becoming more and more available to the average investor, we have to ask ourselves whether the longevity of the 40/60 portfolio originates from its success or naked inertia.

At Trinary Capital, we believe that there are options that may suit some investors better, and we believe that exploring those options and embracing changes in the investment management industry are both part of our fiduciary duty. To that end, we introduce The Trinary Income Model with Alternatives - 40/30/30 or 40% equities, 30% fixed income, and 30% alternatives.

Let's review how investors have historically drawn down on a 40/60 portfolio. This is represented in Figure 1. If we consider 5 periods of 5 years, we can spilt our 40/60 portfolio into a series of portfolios with increasing equities and decreasing fixed income. Why do we do that? The expectation is that the payoff from equities will become greater in the long run despite short term market fluctuations. Along that same line of thinking, we expect short term stock market fluctuations will have a more muted impact on fixed income. In numbers, this looks like 40/60 = 0/100 + 20/80 + 40/60 + 60/40 + 80/20 in Year 0. As we spend down the first portfolio, composed solely of fixed income (0/100), we have a 50/50 portfolio composed of 50/50 = 20/80 + 40/60 + 60/40 + 80/20 and so on. This division allows the equities to experience long term equity premiums.

The unanswered questions in this approach are hanging in the air

1. Where do stocks go from historically high multiples of forward earnings.
2. Where does fixed income go from historically depressed interest rates and a threat of inflation?

Those are questions which deserve longer answers than we can accommodate here. The point that we can raise here is diversification; we can diversify these risks with alternatives.

Alternatives can be a valuable tool for diversification. At Trinary Capital we believe we have developed a unique way of combining liquid alternatives into an effective and controlled asset class for exactly that reason. Please see our academic paper in the Journal of Investment Management (A Portfolio Strategy with Hedge Funds and Liquid Alternatives (joim.com)). In balancing the alternatives allocation against equities we believe we can more effectively provide long term benefits to diversification. It is at this point where we must point out that this is not the superficial exercising of filling an alternatives bucket with gold, oil, corn, or any other generic combination of alternatives. At Trinary Capital we have a quantitative approach driven by mathematics for designing this unique allocation. The upshot of this approach is in Figure 2. We believe this may be a more effective way of spending down a 40/60 portfolio with alternative investments. We believe that alternatives allocation balances out the muted returns in equities during stock market downturns and the lackluster returns of fixed income after inflation is considered. The evolution of the spending portfolio is analogous to that described previously.

Trinary Capital believes in incorporating modern offerings in investment management into investor portfolio in an intelligent and quantitively driven manner for the benefit of our clients. This involves bringing a level of sophistication typically reserved for Institutional Investors and Ultra High Net Worth clients to the average investor.