After the recent swing in the equities market, more anxious investors may consider alternative investments and exchange traded funds to help even out an investment portfolio.
Alternative investments provide exposure to assets with little or no correlation to traditional stocks and bonds, which can help offset a portfolio’s potential losses in volatile conditions. For those with a low risk tolerance, an alternative investment strategy could help protect one’s assets
For example, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI) is the largest alts-related ETF and has been trading since March 2009. QAI is tries to reflect the performance of a customized index that tracks the risk-adjusted return characteristics of hedge funds through long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging market investments.
The strategy has been outperforming as the markets soured this year, with QAI up 1.3% over the past three months while the S&P 500 index dipped 0.8%.
Investors can also take a broad approach to investing in alternative assets. For instance, the newer PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT) and ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) also employ a range of alternative strategies to enhance risk-adjusted returns when added to a traditional stock and bond portfolio.
Specifically, ALTS employs long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread investments. The actively managed LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities.
Additionally, investors can also select single styles, such as Index IQ Merger Arbitrage ETF (NYSEArca: MNA), ProShares RAFI Long/Short ETF (NYSEArca: RALS) and WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI). MNA would capitalize on arbitrage opportunities through mergers and acquisitions activities. RALS tries to generate an absolute return through taking long equities positions while simultaneously hedging through short exposure. Additionally, WDTI tries to provide uncorrelated to broad market equity and fixed-income returns through a combination of long and short positions in U.S. treasury futures, currency futures, non-deliverable currency forwards, commodity futures, commodity swaps, U.S. government and money market securities.
Due to the multitude of investment strategies available, advisors and clients should take the time to understand the products before adding them into a diversified portfolio. Advisors wouldn’t necessarily overweight alternative strategies in their investment portfolios, but they would add a small portion into these products, capitalizing on factors like diversification, low correlation, enhanced risk-adjusted profile, absolute returns, poor bond market outlook, investments that clients wouldn’t find themselves and enhanced yield. [Alternatives ETF in the Early Stages of Growth]
Potential investors, though, should be aware that these types of investments are not meant as growth strategies to generate outsized returns in their portfolios. In reality, these strategies are doing exactly what they were made for, diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, alts can shine.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.