The model business seems to have a couple of different applications. One is that this is what the robo advisors are doing. A client’s inputs determine a portfolio that the robo firm will then rebalance for the client. Another big one, but it is still very early days, is the outsourcing of portfolio management for financial professionals. This is absolutely a valid concept in that a small RIA with a couple of partners needs to handle customer service issues, planning issues, compliance and business development all of which leaves very little time for the task of portfolio management. You’ve likely already read a lot about them at ETF.com and they will become increasingly prevalent.
The difference between ETFs that target some alternative exposure and ETF models (whether they include alts or not) is that they do not take on the complexity that comes with targeting similar exposures through the hedge funds and private equity funds as discussed in the Forbes article.
The other issue to address is patience. If equities are the best performing asset over the long term and alternatives generally don’t look like equities then there should be no shock if your merger arbitrage fund (just one example) did not keep up with the S&P‘s 200% gain over the last five years, there’s a good chance that your managed futures fund (an example) did help offset some of the decline from six years ago. After many years of great stock market gains and often poor performance for alternatives investors may repeat the behavior of taking on more risk and volatility after the market moves up while becoming impatient with holding they bought when they thought they didn’t want full stock market volatility.
Patience and discipline are crucial elements to long term investing success. Investment models will be the answer for some folks to maintain patience and discipline.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.