During a bullish market condition, though, alternative strategies can underperform. According to Morningstar data, seven categories of liquid alt funds have massively underperformed stocks over the past five years, whereas the S&P 500 has generated double-digit returns in every year but 2011.
However, when markets are volatile, alternative investments will shine. For instance, in 2008 when stocks plummeted during the financial downturn, most alt funds outperformed the S&P 500 index.
While it may be unpopular to act conservative and hedge market turns with an alternative investment with the markets in the midst of a bull rally, these alts strategies could help diversify against a potential turn. The S&P 500 has almost tripled from its 2009 low and has yet to experience a correction of 20% or more, which typically happens every three to five years.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.