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Jan 16 2013

4th Quarter 2012 Commentary - ASTON/Lake Partners LASSO Alternatives

4th Quarter 2012

A Tale of Two Markets

The fourth quarter of 2012 was a tale of two markets for equities. During the first two weeks of October, the S&P 500 Index struggled—and failed—to hold its high for the year, which coincided, ironically, with the Federal Reserve’s announcement of another round of quantitative easing (QE3) in mid-September. The index then went into a sharp tailspin on worries about the potential fiscal cliff and political dysfunction in Washington. By the middle of November, the S&P 500 had declined 5.8%. From that point through year-end, however, the market managed to climb back up, albeit erratically, as sentiment responded to signs that there would be a compromise on taxes.

The S&P 500 finished the quarter down slightly, though small-cap value stocks (as represented by the Russell 2000 Value Index) outperformed with a gain of more than 3%. International equities followed a similar pattern, but with less downside and significantly more upside—with the MSCI EAFE Index dropping only 3% by November and finishing the quarter up 6.6%.

In fixed-income, the US Treasury yield curve steepened, with the 10-year bond yield ending the year at 1.76% after touching the 1.6% range at mid-quarter. Spreads continued to narrow for high yield and corporate bonds. The meaningful development in European fixed-income was a decline in yields on Spanish and Italian 10-year bonds, reflecting the impact of the European Central Bank’s (ECB) supportive policies. Consequently, the euro tended to strengthen versus the dollar. In contrast, the yen weakened significantly against the dollar, particularly when it became clear that Shinzo Abe would be elected Prime Minister on a platform that included pressuring the Bank of Japan to engage in increased monetary stimulus.

Equity-oriented Boost

The Fund gained ground during the quarter, outperforming its HFRX Equity Hedge Index benchmark, further boosting positive results for 2012 and calendar year outperformance over the benchmark. All of the portfolio’s long-biased and long/short equity-oriented allocations made positive contributions to performance during the quarter, and collectively accounted for the bulk of returns due to a combination of strong stock selection and effective hedging.

Elsewhere, Hedged Credit and Strategic Fixed Income strategies did well as spreads narrowed. High yield and mortgage exposures in particular tended to add value. Holdings within Merger Arbitrage generated relatively stable results as corporate events tended to be more relevant to their portfolios than market action. In the Global Macro area, the Fund’s one underlying manager not only had a solid gain but was less correlated as a number of its eclectic sub-strategies proved productive.

The allocation to a long/short Commodities strategy slipped as its quantitative approach remained out of sync with the market. Fortunately, it was a small allocation, which was sold early during the quarter.

Risk management is integral to our investment approach and the Fund remained within our guideline volatility targets throughout the year. Daily returns did not exceed ±1% on any trading day. There was no monthly drawdown* of more than 4%, which per our strategy would have required adjustment to exposures in the portfolio. In fact, the Fund provided positive returns in every month of the year except May.


Due to the ongoing potential for volatility in the financial markets, we maintained the portfolio’s net equity exposure in the 30% to 35% range (the Fund’s guideline net equity exposure range is 20% to 50%). This position was supported by the relatively defensive stance of some of the portfolio’s core underlying managers and the continued inclusion of non-equity related strategies such as long/short Hedged Credit, Strategic Fixed Income, and Global Macro.

Although the core of the portfolio remains a diverse set of equity-oriented allocations, we adjusted several other strategy areas during the quarter. We increased the allocation to Hedged Credit and Strategic Fixed Income from 25% to 30% of net assets. Merger Arbitrage was reduced to 10% from 15%, and the combined allocation to Global Macro/Commodities was scaled back from 8.5% to 7.5% with the previously mentioned elimination of the out-of-sync commodities manager.

Equity-oriented funds accounted for 50% of the portfolio as of the end of December, only slightly higher than the 48% allocation ending the third quarter. This broad category encompasses a diverse mix of long-biased, hedged, multi-asset, and global strategies. We continued to focus allocations on core managers with relatively more stable risk/return characteristics.

The increase in the fixed-income arena came mostly in the Hedged Credit area, which comprised roughly 17% of the allocation by year-end versus 13% for Strategic Fixed Income. The funds in this area tend to take a global approach, long and short, to a wide range of opportunities. Currently, there is a strategic emphasis on opportunities in the US non-agency mortgage-backed securities (MBS). The added weighting came at the expense of the Merger Arbitrage allocation, where we think the upside has been limited due to reduced merger & acquisition (M&A) activity and relatively narrow spreads.


As evident again during the fourth quarter of 2012, the “pendulum” of investor sentiment has swung back and forth between two perspectives since the global credit crisis of 2008. The negative side has focused on the debt crisis in Europe, doubts about the resilience of China, and fears of tepid growth and policy paralysis in the U.S. The positive side has reflected strong corporate earnings and efforts by government central banks to provide stimulus. The fourth quarter was a fitting example of how sentiment has vacillated in response to policy and political issues—equities slumped when rhetoric in Washington concerning the fiscal cliff became contentious, and rose when negotiations appeared to be progressing.

Thus far, there are few signs of a slowing in the swing of the pendulum. Policy and political issues that have dogged investors remain unresolved, particularly the debt ceiling and budget sequester in the U.S. Furthermore, the U.S. faces a fiscal drag from recent tax increases. Conversely, Europe seems to be struggling towards finding a way to address its debt problems, and China’s economy appears to be turning the corner.

Longer term, the outlook is relatively positive, as the global economy is expected to “muddle through” on the back of strong corporate cash flows and balance sheets in the U.S. as well as generally fair equity valuations. It is the near-term that is challenging. Thus, we are maintaining a diversified mix of equity-oriented, credit-oriented, arbitrage, and macro strategies, with different degrees of correlation and market sensitivity. 

Lake Partners, Inc.
Stamford, Connecticut

Past performance is no guarantee of future results.

* “Drawdown” is the percentage peak-to-trough decline in performance for a specific period, often used as a measure of investment risk.

Note: The Fund is a fund-of-funds, and by investing in the Fund you incur the expenses and risks of the underlying funds it invests in. Potential risks from exposure to the underlying funds include the use of aggressive investment techniques and instruments such as options and futures, derivatives, commodities, credit-risk, leverage, and short-sales that taken alone are considered riskier than conventional market strategies. Use of aggressive investment techniques including short sales may expose an underlying fund to potentially dramatic changes (losses) in the value of its portfolio. Short sales may involve the risk that an underlying fund will incur a loss by subsequently buying a security at a higher price than the price at which the fund previously sold the security short.

Before investing, consider the Fund’s investment objectives, risks, charges, and expenses. Contact 800 992-8151 for a prospectus or summary prospectus containing this and other information. Please, read it carefully. Aston Funds are distributed by Foreside Funds Distributors LLC.


Aston History (212 KB, PDF)
Capabilities Brochure (2 MB, PDF)
Aston Style Box (46 KB, PDF)
Aston Subadvisers (490 KB, PDF)

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