Institutional investors and hedge funds are expected to significantly raise their allocation to alternative investment strategies ahead. With exchange traded funds, any investor can access alts strategies as well.
According to PwC, the alternative investment industry is expected to expand fivefold to at least $13.6 trillion in the next half decade, compared to its current $2.5 trillion, reports Svea Herbst-Bayliss for Reuters.
PwC also calculates that liquid alternative funds could grow to $664 billion by 2020 from $260 billion at the end of 2013.
“Alternative asset management will undergo a transformation in the years to 2020 and beyond as it adjusts to a new operating and economic environment and moves toward center stage,” PwC said.
Pension funds are more interested in made-to-order investments that help mitigate risk, maintain wealth and meet liabilities. For instance, sovereign funds project that alternatives could make up 14% of their portfolios by 2020. Meanwhile, more affluent investors want access to strategies that have been previously off limits or limited to the institutional-sized investment portfolios.
Investors can also take a look at ETFs that track alternative investment strategies. For instance, the newer PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT) and ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) 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 as well, 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 capitalizes 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 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.
Potential investors should be aware that these types of investments are not meant as growth strategies to generate outsized returns in investment 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 alternative investments, visit our alternatives category.
Max Chen contributed to this article.