How alternatives are changing the landscape of investing

The development of alternative rock music in the ’80s and ’90s changed music forever. The name “alternative rock” is an umbrella term for underground music that emerged in the wake of punk rock in the mid-80s. According to various definitions, alternative music includes everything from the gloomy soundscapes of Gothic rock to the jangling guitars of indie pop to the dirty guitars of grunge to the revivalism of Britpop.
Alternative investments have also been around for decades, but they have not become mainstream until now. Alternative mutual funds are relatively new and gaining popularity. These are publicly offered, Securities and Exchange Commission-registered funds that use investment strategies which differ from the buy-and-hold strategy typical of mutual funds. Compared to a traditional mutual fund, an alternative fund typically holds less traditional stock/bond investments and employs more complex trading strategies.
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Alternative investments, much like alternative music in its beginnings, are still not completely understood by a majority of investors. Searching for something new that can offer them risks different than normal investments, investors are starting to flock to alternative mutual funds, much like followers of mainstream rock music flocked to the bands playing in small clubs and recording on indie labels.
Predominately, alternative rock lyrics tend to focus on topics of social concern, such as drug use, depression, suicide and environmentalism. Alternative rock was a way for young musicians to express their discord with the social and economic strains in the U.S. and UK during the ’80s and ’90s.
PORTFOLIO DIVERSIFICATION
For investors in the last few decades, combining a variety of equity asset classes with varying correlations to the S&P 500 index and U.S. bonds provided enough portfolio diversification for most to be satisfied with their returns. But investors received a rude awakening, discovering during the 2008-09 financial crisis that their portfolios weren’t as diversified as they thought. During the down markets of the last two decades, traditional asset classes moved in the same direction and more closely together. U.S. bonds continue to provide diversification, especially during stressful times, but in today’s environment of historically low interest rates, there’s no guarantee U.S. bonds will continue to be effective diversifiers.
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Like the disillusioned young musicians of the ’80s and ’90s looking to stand against the mainstream, investors are looking for alternative solutions to their diversification difficulties. Alternative mutual funds seek to accomplish their objectives through non-traditional investments and trading strategies and may invest in assets such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash.
In some cases, an alternative mutual fund’s primary objective is to generate above-market returns. In other cases, a fund’s main goal is to help investors better manage risk using strategies designed to offer greater diversification or smooth out volatility.
Both alternative music and alternative mutual funds go against the norm in their respective industries. After the ’90s, alternative music became pretty mainstream, spawning several bands still popular today. Alternative investments and alternative mutual funds are on their way to becoming mainstream. The Investment Company Institute this year has added alternatives to its classification system, and Morningstar Inc. has categories and ratings for alternative mutual funds. Advisers are also taking notice and learning more about alternative investments in order to educate their clients and add them into portfolios.
The downside of alternative music in the ’80s and ’90s was the artists’ inability to capitalize on their success. Many of the bands rejected fame by refusing to give interviews or use concert promoters. Numerous bands broke up, with many members struggling with drug addictions to cope with their now public lives. Many talented musicians were never heard from again.
The downside of the advent of alternative investments — such as hedge funds, commodities, managed futures and currencies — is the lack of track records for a significant number of alternative mutual funds. As track records develop for alternative mutual funds and successes are realized, additional new and exciting opportunities will unfold and soon other asset classes will be deemed “alternative.”
Throughout much of its history, alternative rock has been largely defined by its rejection of the commercialism of mainstream culture. A popular concept, the alternative music genre led to many subgenres and still influences music today. It’s much the same with alternative investments — the investments available today will lead to other investment categories and will influence investing far into the future.
Andrew Rogers is CEO of Gemini Fund Services.