Why the experts are betting on alternative investments now

May 18, 2014 @ 12:00 am

Runtime: 3:43

Adding alternative investments to client portfolios can help minimize losses, reduce risk and secure retirement goals, according to executives at Goldman Sachs, Federated Investors and Collins Capital Investments.

Video Transcript

[MUSIC] With the equity markets at all time highs and bond yields at all time lows, there's probably never been a better time to allocate into alternative strategies for hedging and maybe some leverage. We're here in Chicago, talking to 3 alternative investing experts on what can be done inside portfolios to help investors manage some volatility. Well, the nice thing about Altern is they're a different definition of risk in our world. At Federated we think of risk as minimizing your drawdown or loss of capital. Most people don't think about risk as tracking error or standard deviation. They, what, they want to know what the impact is on their portfolio. If I lose money, I feel that more than if I gain money. So they wanna minimize loss. So we wanna compound your wealth by minimizing your losses first and compounding second. So you're not gonna want less than 10% because it just isn't gonna move the needle. And most feel comfortable in the 20, the 25%, a range that is more of a subjective call than a mathematical call. If you put it in an optimizer and start saying, you know for risk reduction and return enhancement that number would go up. But because of the fact alternatives are relatively new particularly in the mutual funds phase, the comfort level tends to be about 20-25%. A lot of people wonder what alternative strategy should be doing for their portfolio. What the it, is the impact? We would say the impact for adding alternative strategy to your portfolio is to diversify your return streams and your growth streams. Also to focus on increasing your income and to have less interest rate risk and also to minimize draw down. I, that's how we define reducing your exposure to market risk. I hope that we see more liquid alternatives in 401K defined contribution plans and the reason is that most of the defined contribution plans that we see you 90% cent of them. So virtually all of them are allocated to domestic and developed international equities, and core fixed income. And so they're, they're very undiversified in terms of even having satellite asset classes in them. And what defined contribution plan participants are interested in is retirement, right, they need to reach their, they need to make sure that they reach their retirement goals. They, they're worried about inflation protection. And so having satellite asset class as an alternative investment can help can help them reach their goals particularly in the environment that we're in where we have a lot of baby boomers ready to retire, ready to take out their money from these types of plans. And their only options are basically loading up on fixed income which in a rising interest rate environment is perhaps not the best idea. So, when people start thinking about distributions and harvesting their portfolio so they can live on it, they don't want to have to change their lifestyle in later years because their bond coupon dropped or the CD coupon rate dropped. What they want to know is can you give me a 6%, 5% return year in and year out. And they really don't care if some of it came from dividends, some of it came from a bond deal, some of it came from a coupon, some of it came from arbitrage or long short. They wanna know what's my chances of getting my money out, not exactly where it came from. Just like social security doesn't tell you where they earn their money from or any other defined benefit distribution doesn't tell you how they made the money that they pay out. They are responsible to pay the money out and that's what they want. So products that can actually have a higher probability of paying out a decent level would be, I think the growth of the future. [MUSIC]


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