Rise in offbeat investments correlated to ‘correlation crisis’

The uncertain economic outlook for at least the next five years — along with ‘a correlation crisis’ — should lead to increased use of unusual investments, according to alternative investment strategist Gabriel Burstein.

Speaking Monday in Chicago at the InvestmentNews Alternative Investments Conference, Mr. Burstein laid the foundation for how and why financial advisers should be looking beyond traditional asset allocation models and strategies.

He cited the example of managed-futures strategies as one of the few bright spots from the 2008 financial crisis but warned that such noncorrelated strategies are becoming increasingly difficult to uncover.

“You might not have heard of the correlation crisis, because I came up with it,” he said. “But the main source of the correlation crisis boils down to the three main sources of portfolio management: fundamentals, technical quantitative and macro.”

Macro strategies, he explained, have lost much of their strength to outperform due to the simple realities of transparency and endless streams of information. Fundamental strategies are affected by transparency but also from what Mr. Burstein described as a lack of sustainability and a credibility problem. He noted that investors who are spooked have a hard time believing and embracing good fundamental data.

That leaves the technical quantitative approach, which can involve high-frequency trading, as “probably one of the major sources of returns,” Mr. Burstein said.

As part of his presentation, Mr. Burstein drew distinctions between alternative strategies that generally include anything that is not long-only, and alternative assets, which can comprise a long and diverse list.

Some examples of alternative assets are fisheries, vineyards, lumber and alternative energy.
He also called the movie industry “the most noncorrelated strategy but also the least explored and without a lot of capacity.”

Ultimately, he added, financial advisers need to embrace alternative investments as the “new glide path” in portfolio construction.

For example, as clients move closer to retirement, instead of increasing the fixed-income allocation, Mr. Burstein suggested a greater allocation to alternative strategies as a component of risk management.