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Jan 13 2012

4th Quarter 2011 Commentary - ASTON/Lake Partners LASSO Alternatives

4th Quarter 2011

Although US equity markets posted strong results during the fourth quarter, the investment environment continued to display the same roller-coaster volatility that characterized much of 2011. For example, while the broad market S&P 500 Index rose 11.8% by the end of the quarter, it had quite a ride getting there: The index climbed 13.7% from September 30 through October 27, then plunged 9.6% by November 25, only to jump back up 9.0% over the next eight trading days before moving sideways in a narrow range for the rest of December.

Given the Fund’s hedged approach and modest net equity exposure (approximately 37% at year-end), it performed well in gaining more than 4% while dampening volatility relative to the S&P 500. Furthermore, it outperformed its HFRX Equity Hedge Index benchmark, which posted a small loss for the quarter.

A significant portion of the Fund’s overall gain came from its core Hedged Equity and Long Bias managers, who captured the bulk of the rise in equities. Elsewhere, credit-related strategies delivered solid results as pressure on the high-yield market dissipated and credit spreads improved. Merger Arbitrage managers tended to make relatively steady progress throughout the quarter. Increased merger and acquisition (M&A) activity has helped improve the outlook for the strategy, but modest spreads continue to limit the upside. Strategic Fixed Income managers also were positive, but performance was mixed depending on exposures to emerging markets and other international sovereigns.

On the downside, Global Hedged Equity managers tended to lag, but these were small allocations within the portfolio. Hedged Futures/Commodities allocations were also under pressure for much of the quarter. Although returns were negative, the downside was fairly limited.

Positioning Update

During the fourth quarter, we re-deployed a large portion of the cash raised during the previous quarter in accordance with our risk management guidelines. Although the equity markets remained volatile, several alternative investment strategies began to stabilize and perform better as opportunities improved. This was particularly apparent for several of our underlying managers in the Hedged Equity and Hedged Credit areas, as well as in Merger Arbitrage and, to a lesser degree, Strategic Fixed Income. In contrast, Hedged Futures/Commodities were out of sync. Having entered the quarter with a defensive cash reserve of nearly 24%, the Fund’s cash allocation at year-end was 10.2%.

Equity-oriented funds accounted for 47.9% of the assets in the portfolio at the end of December, slightly more than at September 30. Although this is the largest single strategy allocation in the Fund, it is important to note that this broad category encompasses a diverse mix of Long Bias, Hedged, US Multi-Asset, and Global strategies. Having eliminated several Long Bias managers that had become especially volatile during the third quarter, we continued to focus allocations on core managers with relatively more stable risk/return characteristics.

Hedged Credit and Strategic Fixed Income allocations had been scaled back from nearly 22% at the end of June to slightly less than 10% by the end of September. By the end of December, however, the allocation was back to 25%. We re-built the Fund’s allocation to Hedged Credit during the quarter as valuations improved and fundamentals remained solid. We also increased Strategic Fixed Income, but only at the margin, and we have kept this allocation at a lower level than Hedged Credit. The funds in this area tend to take a global approach, long and short, to a broad range of opportunities, ranging from US mortgage-backed securities to emerging market debt. Although opportunities had been created by the nearly one-sided flight to safety in fixed-income during the third quarter, conditions still tend to be unsettled.

Allocations to Hedged Futures/Commodities provide access to trend following, quantitative, and fundamental trading-oriented strategies in a wide range of financial futures and commodities encompassing equity indices, fixed-income, interest-rates, currencies, metals, energy, and industrial/agricultural commodities. Historically, such strategies have tended to be less correlated to other strategies, especially during market corrections such as the one during the third quarter. Although our target allocation for this area has been 10%, it was actually less than 7% at year-end due to the elimination of one manager owing to a change in the structure of their investment program, which raised concerns about counter-party risk. Our intention is to re-build the Fund’s allocation going forward.


The volatile and erratic behavior of markets over the past few quarters has made one thing abundantly clear—investor sentiment remains extremely sensitive to economic policy and political considerations. Markets slid on fears of policy inaction, dysfunction, and missteps, and then popped in reaction to decisive, concrete, and reassuring measures. Although solid corporate fundamentals and improved valuations for U.S. and Emerging Market equities present abundant opportunities for the long term, investors have been fixated on the day-to-day developments in Europe’s struggle to come up with a convincing approach to its sovereign debt situation. In turn, this has amplified the market’s reactions to global economic data, whether positive or negative.

Markets face a “tug of war.” On the one hand, the corporate sector generally remains flush with cash, and despite the exposure of European banks to sovereign risks, the global financial system is on a much sounder footing than it was in 2008. On the other hand, the drama in Europe is far from over, the U.S. lacks consensus on how to address its economic and fiscal problems, and China is still occupied with the very complex task of trying to engineer its own “soft landing.”

Markets therefore remain beholden to political events, which by nature are highly unpredictable. Consequently, an unusual degree of uncertainty continues to cast a shadow over the investment landscape. We therefore continue to maintain a diversified mix of strategies within the Fund, with different degrees of correlation and market sensitivity. We believe that this approach will lead to attractive risk-adjusted returns over time. 

Lake Partners, Inc.
Greenwich, Connecticut

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 includes 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, carefully consider the fund’s investment objectives, risks, charges and expenses. Contact 800 992-8151 for a prospectus containing this and other information. Read it carefully. Aston Funds are distributed by BNY Mellon Distributors Inc.


Aston History (212 KB, PDF)
Capabilities Brochure (2 MB, PDF)
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