Praemium Investment Leaders

Live from AltInvest: Navigating Market Volatility with Liquid Alternatives

• Praemium

Share episode

What happens when traditional portfolio diversification fails? In this eye-opening conversation from the 2025 Premium Altinvest Forum in Melbourne, host Damian Chilmey sits down with Paul Fraynt, Senior Vice President and Portfolio Manager at Franklin Templeton Investment Solutions, to uncover the truth about achieving genuine protection against market volatility.

Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.

We recommend that individuals seek professional financial advice before taking action.

Damian Cilmi:

Hi listeners, welcome to another episode of the Premium Investment Leaders podcast. I'm Damian Cilmi and today we're coming to you live from the 2025 Premium AltInvest Forum, where we're chatting to Paul Fraynt before he gets up on stage to discuss liquid alternatives and about Paul Fraynt he is a Senior Vice President and Portfolio Manager at Franklin Templeton Investment Solutions. He joined previously the successor of K2 in January 2017 and was Head of Direct Trading and Quant Strategies and has over two decades of buy and sell side experience, specializing in alternative investments. Hi Paul, welcome to the show. Welcome to Melbourne all the way from New York City. Thank you so much. We're talking about liquid alternatives here and how they get utilized within portfolios, and we see a lot of different things within portfolios and they may be diversified and everyone talks about diversification, but what about correlations?

Paul Fraynt:

Yeah, no, it's a great question. So it's true that diversification is quite likely the only free lunch in finance, and by that definition, many investors obviously build a portfolio of what they believe to be diversifying asset classes or diversified ideas, diversified sources of returns. Typically, most investors would be loan equities, they would be loan bonds, and they tend to diversify them with private equity, private credit very popular these days maybe some sort of commodity allocations and so on. But when you look at all of these different approaches, they tend to be positively correlated to each other. So private equity, private credit, can be correlated anyway between positive 30% to positive 80-90% with just being loan equities, depending on what you pick in your portfolio. On the other hand, what would be particularly attractive would be to diversify your typical portfolio, which is loan equities, with something that has negative correlation to equities, and this is what we specialize in In liquid alternatives. We build portfolios, we build funds and we run funds which run with negative beta to equities persistently. So Now, that's true. Diversification Now that's true diversification.

Damian Cilmi:

I imagine you're talking a lot to investors about this because you know we've had, you know, some equity market sell-off recently. There's been many reasons for that there, but there's also one of the things is there's some inflationary issues in this backdrop as well, and so would long-duration bonds save investors in this kind of environment.

Paul Fraynt:

Yeah, I see.

Paul Fraynt:

So it depends a lot on what kind of regime I guess what people would say past dependency we're going to go through going forward.

Paul Fraynt:

So bonds is an excellent diversification to equities if growth is slowing down without inflationary pressures, with recent slowdown inspired a lot by the promise of global tariffs, and tariffs, by definition, are inflationary.

Paul Fraynt:

Now the question becomes if inflationary impulse of those tariffs are one-off, ie what people would say transitory, or is it going to be longer-lasting because of all the plans to onshore production, which is, in the United States, a lot more expensive, and then what impact it's going to have outside the borders? So, specifically for the United States, it's going to be effectively a balance between inflationary impact of onshoring local production, a local, much more expensive workforce, as well as a tariff which will make goods a lot more expensive. That's inflation on one side. On the other side, the effectively uncertainty in growth slowdown that is happening from all the changes and will that be that is obviously deflationary impact and the balance between the two. That's what's going to determine whether or not treasuries or bonds would work as a diversifier to equities or would contribute potentially in the same direction in case slowdown overwhelms inflationary impact defensiveness or diversifies for equities.

Damian Cilmi:

Is there a silver bullet out there or do you need many different things in the arsenal to help diversify and maybe protect some big draws in equities?

Paul Fraynt:

Well, I would obviously argue that our funds, that we're on the K2 Athenae, would be an optimal way to diversify, typical allocation, typical portfolio of as long equities and also diversify, reduce risk, reduce drawdowns and improve returns.

Paul Fraynt:

But generally speaking, it all depends on what kind of risk tolerance investors have, what they actually do have in their portfolios, how risky those equities are. Is it maybe a speculative technology, long duration kind of names, or is it more consumer staples and utilities right, a very different kind of composition portfolio? So from that perspective one would need to first fully understand what is going on as a portfolio. So the way we build our fund is try to be as accommodative, in kind of, for most equity portfolios, but obviously one has to take a look specifically what one has because depending on uniqueness of one portfolio, one may want to consider also some kind of tail hedging strategies which would protect against much sharper drawdown and with much higher convexity as well. But generally we believe that our fund is specifically structured to help investors to weather equity sell-off like the one we just experienced in Q1 and some more.

Damian Cilmi:

Yeah, no, exactly, and not particularly based on the strategy that you have here in Australia. Not particularly based on, you know, the strategy that you have here in Australia. But you know you touched on tail risk before and some strategies within the liquid alts complex are out there and you know they get viewed as insurance. Yeah, now the problem is people don't like paying for insurance.

Paul Fraynt:

Yeah.

Damian Cilmi:

So yeah, have you seen I suppose not only with yours but some of this evolution within this liquid old space of strategies that may have left tail risk payoff but stem some of that insurance cost along the way? How is the combination of these things being put together to help smooth that investor experience?

Paul Fraynt:

No, absolutely so not to promote again our fund. Our fund doesn't come with a negative carry. It comes with actually positive carry as a defensive strategy. But overall the universe of what can be done in liquid alternatives. It spans a variety of different solutions. Some of them come with, I guess one has to pay premium but there are plenty of costless solutions.

Paul Fraynt:

But obviously it's a solution. It's also kind of a sacrifice of something else. So, for example, as opposed to just buying, as an example, a put to protect against equity sell-off, which would be expensive, One can buy, as an example, put spread. So subsidize expensive put with a further out of the money, cheaper put, so the cost of that solution becomes less prohibitive. But at the same time you then protect for only a portion of the sell-off and after a certain point, after a certain drawdown, that protection stops. Another way of doing so could be, let's say, put spread colors as an example, where you can say you can buy put spread, it will be completely cost-free, but then you sacrifice the upside. That's another, for example, idea. There are many, there is a myriad of ideas and many different solutions that we can offer, using not necessarily just equities but even rates and foreign exchange and so on, and it will be to achieve client outcome. And again, it will be solution where there will be certain sacrifices and certain benefits, and that's what it's about.

Damian Cilmi:

Yeah, fair enough, I get it. And just finally here in Australia, but also, you know, speaking to investors, but obviously speaking to investors offshore a lot. So what are some of the recent conversations that you're having with institutional investors? You know not just about your fund, but you know a lot of concerns within their portfolio. What are they now worried about and trying to solve for?

Paul Fraynt:

Yeah, so conversation very widely. It all depends on what horizon investor has. There are some of the institutional clients I met that have a 10-year horizon, so they're not as concerned as to what's going on with tariffs this year but what the world is seemingly tilting toward and that becomes a very different conversation. A lot of it is about global macro geopolitics and where growth is likely to accelerate versus decelerate and so on. And then there are other clients who are more short-term oriented. What's tactical positioning over the next months? How clean positioning has become in equities and in bonds? What's the US dollar exposure? Are people still on US dollar, short US dollar now? So it's a whole gamut of conversations. I would say in general, if I were to put a kind of like one unifying, one unifying band over what discussion is about. They just want to understand what is going on. What is the end objective, realistically speaking, with what after the new administration came to the White House in the United States and what they would like to achieve.

Damian Cilmi:

Yeah, and what it means for their portfolio, as I mentioned as well.

Paul Fraynt:

Yes, that's the outcome of that. Yeah, and what it means for their portfolio, as I mentioned, as well, yes, that's the outcome of that.

Damian Cilmi:

Yes, no, no, great Paul, it was fantastic to have you here in Melbourne. Thanks again for joining us.

Paul Fraynt:

Thank you so much for having me.

Praemium:

Premium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for promotional purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with premiums. For more information about premium, including our disclosure documents, please visit our website. We recommend that individuals seek professional financial advice before taking action.

People on this episode

Head Shot

Damian Cilmi

Host