As markets continue to show signs of volatility, now might be the time for advisers to consider adding some alternative investments into their clients' portfolios.
In fact, experts in an
InvestmentNews' webcast said a portfolio that includes alternatives may provide the same results a traditional portfolio of stocks and bonds.
"These non-traditional strategies are supposed to achieve the same goals as the 60-40 portfolio serves," said Bob Rice, managing partner at Tangent Capital in New York, referring to a portfolio consisting of 60% stocks and 40% bonds.
Advisers are hesitant to incorporate alternative investments because they are considered too risky, the panel agreed. But if they take into consideration the fact that markets are currently not doing any better — stocks are fully valued at best and bonds are being threatened with rising interest rates — alternatives don't look so bad.
"What do you do in that environment for returns?" said Nadia Papagiannis, director of alternative investment strategy at
Goldman Sachs Asset Management. "We think alternatives are the answers to that."
VOLATILITY IN THE SPOTLIGHT
It is especially true these past few months, as volatility has been thrown into the spotlight. Ms. Papagiannis said during this time, now and historically, alternatives have proven most days to be a helpful addition, with nice returns, to any portfolio during the ups and downs.
And yet, advisers haven't gone all in. In an Aite Group study that surveyed 338 advisers in 2014, alternative investments represented only 5% of the products advisers chose to include in their portfolios.
Ms. Papagiannis said there are four
hedge fund-like strategies to accomplish these goals: equity long-short; relative value, which is the difference between two similar securities; event-driven, which looks at merger funds trying to cap profit from corporate events; and tactical macro, which adapts to trends.
Rick Lake, co-chairman of Lake Partners in New York, said that in order to apply these strategies and use alternative investments, advisers need to learn more about each of the investments. Then they can apply it to client goals and time horizon.
"They need to be understanding of what might make these investments work and what might be challenging for them," Mr. Lake said. "Understand what you're working with."
The three agreed that a diversified strategic basket of alternatives in a portfolio is the best bet of all.
"Don't be lazy," Mr. Rice said. "I think for clients' best interests, we owe it to them and ourselves to get educated and be able to communicate it effectively to clients."
"They are going to need it," he said.
