Unconstrained Investing
Candlefocus EditorThis type of investment strategy can benefit investors in three distinct ways. First, it gives managers a greater degree of freedom to pursue market opportunities that they deem advantageous. These investors have the ability to take action immediately, when industry or market conditions dictate, something that may not be possible if the fund is bound to the performance of a benchmark, such as the S&P 500 Index.
Second, unconstrained investing can open up opportunities for managers to seek higher returns by access to a wider range of investments. By investing in a larger array of stocks, bonds, money market funds and other instruments, fund managers are less likely to miss out on market movements or potential opportunities that may not be available through a constrained investing strategy.
Third, unconstrained investing can also allow fund managers to better diversify their holdings. This approach gives managers the ability to find the best global investments regardless of where they’re located, creating potential to capitalize on geographic diversification and to minimize portfolio risk.
Unconstrained investing can certainly present some limitations and risks for manager and investors alike. For example, by investing without a benchmark, portfolio managers become more responsible for their own portfolio decisions. That is why it is essential that fund managers conducting an unconstrained investing strategy have the necessary discretion and knowledge when making decisions. As a result, investors should vet their managers to ensure they have a strong and well-defined investment strategy and are familiar with the markets they are investing in.
Additionally, investors should be prepared for periods of volatility or underperformance due to the nature of unconstrained strategies. That said, this type of investing approach can still be beneficial for investors who are seeking higher returns, better diversification and market opportunities that cannot be found in a constrained investing environment.