What is Unconstrained Investing?
Unconstrained investing is an investment style that does not require a fund or portfolio manager to adhere to a specific benchmark. Unconstrained investing allows managers to pursue returns across many asset classes and sectors.
Understanding Unconstrained Investing
Unconstrained investing rose to prominence, in part, from the mistrust surrounding the 2008 financial crisis. Investors were wary of the market, as well as benchmarks, such as the S&P 500 or Russell 2000. Investors often used benchmarks to determine whether the performances of certain securities and full portfolios they selected and managed were meeting expectations. Fund and portfolio managers generally stuck closely to specific guidelines and measured their performance against fixed benchmarks. This inflexibility meant that managers were not always able to take advantage of market changes in a timely manner. It also meant that portfolio managers were highly invested in the american market, which happened to be sitting on top of a subprime mortgage bomb that seriously shook up the financial markets when it went off.
Unconstrained Investing as an Alternative Style
Unconstrained investing is said to focus on performance over time, rather than on short-term gains. It also eschews constraints that arise by focusing on benchmark tracking. For example, in the case of fixed income investing, managers are not required to adhere to specific bond ratings, currencies, or sectors as these requirements may only apply to a portion of the portfolio. Bond portfolio managers are allowed to use derivatives to hedge against price and rate ranges, as well as to bet against the market through put and call options.
This can cause portfolios to see an increase in investment manager risk, since inexperienced managers without guidelines or those operating more independently could make poor decisions that affect the value of the portfolio. Managers are entrusted with understanding not only how different asset classes and sectors interact, but also how different geographies and governments impact performance. It is worth noting that there will still be internal performance metrics and controls designed to measure and control risks. The main difference is that a popular market benchmark will not be the main focus of the metrics.
Access to Unconstrained Investing Styles
While some teams develop their own unconstrained investing styles, established asset managers like J.P. Morgan also have unconstrained strategies that many accredited and high-net-worth individuals can place their money with. On its website, J.P. Morgan describes how its managers that pursue unconstrained investing strategies are able to research and develop their best ideas, across a wide range of asset classes, security types, and sectors. Another way to describe unconstrained investing is a multi-sector, multi-asset, global approach.