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.
For example, investors can take a look at two recently launched alts strategies, the ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) and PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT).
ALTS acts like a sort of fund-of-funds, tracking a Morningstar index comprised of ProShares ETFs. The ETF includes exposure to long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread. [How an Alternative ETF Strategy Fits in Investment Portfolios]
The actively managed LALT tries to provide positive total return with a low correlation to broad securities and can be used as a fixed-income substitute. LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. The fund includes long and short positions in G-10 currency forwards, stocks and VIX index futures, along with a significant long position in interest rate futures. [Diversify with Liquid Alternative ETFs]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.