How Evoke Advisors Co-CIO Alex Shahidi Manages Risk

In this week’s episode of Opto sessions, Alex Shahidi, Managing Partner and Co-Chief Investment Officer at Evoke Advisors, considers three potential outcomes for the US economy as the Federal Reserve tackles rising inflation, and explains how to structure an investment portfolio in an uncertain climate.

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Alex Shahidi is the Managing Partner and Co-Chief Investment Officer at Evoke Advisors, an investment firm with over $20 billion in assets under management, where he focuses on advising large pension funds, foundations, endowments and very wealthy families.

With over 22 years of experience as an investment consultant, Shahidi, who started her career at Merrill Lynch, is an expert in risk management. This is a topic covered extensively in his second book, Risk parity: how to invest in all market environmentswhich was released in March 2022 – and which has never been more timely in the volatile investment landscape.

Ever since Shahidi picked up the phone to Opto sessions on June 9, the S&P 500 experienced a four-day losing streak, wiping out 7% and closing firmly in bearish territory on June 14. However, the index saw some relief after the Federal Reserve announced its biggest interest rate hike since 1994.

While markets have reacted positively to the aggressive tightening, Shahidi says there are three potential outcomes amid a high inflation outlook. “The first is that the Fed stays behind inflation, which means they raise rates, but they can’t get ahead of inflation. The second scenario is that they get ahead of inflation. They raise too much rates, cause a major recession and burst this bubble that’s been building for many years.Then the third is that the Fed is doing it perfectly.They’re raising rates just enough to slow inflation but don’t cause no major recession and they thread the needle perfectly.

However, Shahidi thinks the chances of a soft landing in the third scenario are relatively low. Instead, the odds of seeing runaway inflation could bear similarities to the 1970s, when the rate of inflation remained high for a decade. On the other hand, if rates are raised too aggressively, markets could find themselves in a situation parallel to the 2000s. Shahidi points out that two out of five stocks have tended to underperform cash during these two decades. “The chances of one of these two players playing are relatively high, so we could be in a long bear market,” he said.

Regarding the market environment, Shahidi believes that “we are at a major inflection point where the world has changed.” As a result, he says it’s more important than ever to stay on top of what’s going on in the world. At Evoke Advisors, Shahidi spends a lot of time talking with “some of the smartest investors in the world, like Bridgewater Associates.” He also says he monitors economic indicators, like the rate of inflation, and policy in response to those conditions.

“We are at a major inflection point where the world has changed” – Alex Shahidi

Ultimately, there are a lot of economic outcomes that could happen. As investors seek to re-adjust their portfolios to a wide range of potential outcomes, Shahidi says she has flexibility in an investment strategy by not gearing it to a single outcome. “As an investor, what you’re trying to do is earn an attractive return over time without taking a catastrophic hit. This is the number one priority,” he explains. “When you have an environment like this, with a wide range of outcomes, real balance and real diversification becomes paramount.”

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Martin E. Berry