Exchange traded fund investors can benefit from the diversification qualities of alternative investments, similar to how institutional and high-net-worth investors have taken advantage of the asset class.
John Hancock’s Head of Investments Leo Zerilli likens investing in alternative assets to the Tortoise and the Hare where alternative investments provide a slow and steady approach, whereas traditional stock and bonds provide faster spurts, according to DailyAlts. However, the greater spurts apply to both down and up markets while the alts approach helps soften the blow back during bear markets.
Consequently, investors can utilize alternative strategies to limit a portfolio’s overall volatility. Specifically, these investments help provide assets with low correlation to traditional assets, like stocks and bonds. Nevertheless, Zirelli argues that investors should evaluate the investments within the context of an individual’s existing portfolio.
For instance, as of 2013, over half of all endowment assets held alternative strategies, replacing most of their conservative fixed-income positions. Consequently, prudent or more conservative investors may take a look at endowment asset holdings to get a general sense of their risk exposure. Specifically, in a survey of 831 universities over 2013, endowment allocations included 53% alternative strategies, 18% international stocks, 16% domestic equities, 10% fixed income and 3% short-term securities.
Alternative strategies have traditionally been in the arena of institutional and large investors. However, liquid alt funds have quickly expanded in recent years, and now, retail investors have a chance to gain exposure to alternative strategies through ETFs.