With only about $130 billion in total assets invested in alternative strategy mutual funds and exchange-traded funds, Joanne Hill head of investment strategy at ProShare Advisors LLC, believes that the retail-alternative-products space is only in the "second inning" of growth.
Speaking today in Chicago at the Morningstar Inc. ETF conference, Ms. Hill used examples of institutional investing in alternatives as a road map for where the retail investor can and should be headed.
Ms. Hill pointed out, for example, that endowments of more than $1 billion have average allocations to alternatives of 60%.
Even smaller endowments, she said, have at least 20% allocated to alternative investments.
"The 1970s was the period when endowments really began to think about alternatives, because they had a wake-up call, and they felt they had a long-term horizon and didn't have to worry about liquidity as much," Ms. Hill said. The pension market, she explained, had a similar experience, which started with the development of liability-driven investing and has since moved toward larger allocations to alternative investments.
"We've learned a lot in past decade about importance of alternatives," she said.
Comparing market volatility to weather patterns, Ms. Hill said: "We build our houses to withstand a Level 2 hurricane" and should think the same way about protecting portfolios. Along those lines, she pointed out that alternative strategies are used for managing volatility, enhancing returns and hedging risk.
When it comes to alternative strategies, she said it is important to remember that investors will be exposed to leverage, shorting and derivatives.
"The best portfolio managers want to be running alternatives because they want more discretion to manage risk," she said.