In a trend-based model, equity exposure is cut sharply during a market fall to protect the gains, while a valuation-based model holds lower equity at peak valuations.
Whatever approach is followed, the dynamic management of equity exposure enhances gains during a bull run and cuts losses during sharp downslides. To put it otherwise, it adds to investors’ wealth when the market is performing well, i.e., rising, and prevents a dip in the corpus when is nosedives.
This dynamic strategy of BAF is akin to a game of kabaddi, where teams frequently adopt aggressive and defensive ploys to score points and avoid getting ‘out’. When a raider finds opponent players surrounding him and see thin chances of survival, he retreats. On the other hand, when there’s the slightest of opportunities, he makes an aggressive move to score points.
Switching between these two modes judiciously ensures safety and helps one get the points required for victory. This art, deployed by BAFs, can help in rebalance a portfolio and maintain an equilibrium between risk and reward.
Volatility stems from various factors. To be honest, most of them are beyond one’s control. Having said that, a successful investor is the one who, instead of trying to predict volatility, prepares his portfolio in a manner that can withstand volatility, if not benefit from it.
There are several ways to achieve this practically, but balanced advantage funds (BAFs) stand out among the rest because of several advantages they bring to the table.