The last 48 hours has seen global equity markets, including the S&P/ASX 200 (INDEXASX: XJO) (^AXJO), correct sharply, sparking fears that the decade-long bull market may finally be shifting gear. One might argue this should hardly come as a surprise and is long overdue.
But what can investors caught in the downdraft do now?
We believe the best form of protection against a market downturn is to remove market exposure from the equation. This does not mean avoiding using equity markets altogether, but rather seeking out opportunities that are heavily insulated from market movements yet have a favourable risk/reward tradeoff. Nowhere is this better exemplified than in strategies focusing on merger arbitrage and other ‘special situations’, where compelling risk-adjusted returns are frequently on offer.