Advisers and investors should continue adding alternative-investment products to portfolios, but not at the expense of proper due diligence.
Continued volatility both in the near- and midterm make this an optimal time to hedge downside risk with alternative investments, according to panelists on Tuesday's InvestmentNews webcast, Why alternatives, why now.
“The Fed's quantitative-easing experience to this extreme has never been done before,” said Jim Ball, a principal at Ball Financial Services. “Nobody knows how markets will react when it stops.”
Zoe Brunson, the director of investment strategies at Genworth Wealth Management, took it a step further. Assuming that bond returns will be negative as the QE program winds down, she recommended a mindset of “managing volatility,” not fighting against it.
“We are in a unique period for fixed income,” said Tom Chapin, the chief investment officer at Mill Creek Capital Advisors LLC. “Yes, we can expect it to generate some income … but we can't expect it to provide low volatility.”
Hedge funds remain an attractive alternative-investment vehicle, but participants were quick to warn that they're no panacea. They warned against treating all hedge funds equally when they are as a diverse in performance and integrity as any other managed fund.
“It's all about doing your due diligence on those funds,” Mr. Chapin said.
Ms. Brunson said that she is wary of unfamiliar products and takes care to undertake “including both investment and operational due diligence.”
To ensure a hedge fund is up to snuff, Mr. Ball said that he “looks at these strategies and watch them in a portfolio without any real capital to see how they behave.”
“I don't want my team learning with the client's money,” he said.
Though the participants all were eager to utilize alternative investments in an increasingly volatile environment, they stressed the importance of keeping advisers and fund managers from reaching beyond their expertise.
“It comes down to manager selection,” Ms. Brunson said. Noting the increasing complexity of alternative investment vehicles, the respondents acknowledged that it will take time to adapt.
“Fundamental long-term managers have a culture. Long-short managers are a culture,” Mr. Ball said. “You don't switch because it becomes fashionable overnight.”