Alternatives on the defense
Among the wide variety of alternative investments, some play offense by helping investors build wealth, while others play defense by helping preserve wealth. Given recent market events, these three types of alternatives may be appealing options for investors:
- Market neutral funds, which help cushion portfolios against market swings and mitigate downside risk. Such funds trade related3 equities on a long and short basis so that the fund’s net exposure to the market and its beta are both close to zero. The key to generating a positive return is stock selection — determining which equities to go long and which to go short. Market neutral funds seek to generate positive returns across all market cycles. Invesco All Cap Market Neutral Fund and Invesco Global Market Neutral Fund are examples of market neutral funds.
- Long/short equity funds, which hedge equity exposure while providing the potential to participate in equity market upside with the possibility for some downside protection. Allowing investors to participate in the equity markets on a hedged basis, these funds combine both long and short equity positions in a portfolio, while typically being net long to equities. As a result, fund performance often tracks that of the overall equity market, but the fund would be expected to underperform during a rising equity market (due to potential losses on the fund’s short equity positions) and outperform during a falling equity market (due to potential gains on the fund’s short equity positions). Invesco Long/Short Equity Fund and Invesco Macro Long/Short Fund are examples of long/short funds.
- Global macro funds, which invest opportunistically on a long and short basis across the global equity, fixed income, currency and commodity markets. Because they invest opportunistically, global macro funds have the ability to determine which markets they want to participate in and which to avoid. Because these funds have the ability to invest on both a long and short basis, they have the potential to achieve profits in both rising and falling market environments. Invesco Targeted Returns Fund and Invesco Global Markets Strategy Fund are examples of global macro funds.
Diversification is key in times of volatility, and alternative investments offer a variety of strategies to help investors potentially build and preserve wealth over the long term.
Read more expert views on market volatility.
1 Source: StyleADVISOR. Alternatives are represented by a portfolio comprising equal allocations to alternative assets, represented by FTSE NAREIT All Equity REIT Index, Bloomberg Commodity Index; relative value strategies, represented by BarclayHedge Equity Market Neutral Index; global investing and trading strategies, represented by BarclayHedge Global Macro Index, BarclayHedge Multi Strategy Index and BarclayHedge Currency Traders Index; alternative equity strategies, represented by BarclayHedge Long/Short Index; and alternative fixed income strategies, represented by Credit Suisse Leveraged Loan Index, HFN Fixed Income Arbitrage Index and BarclayHedge Fixed Income Arbitrage Index. The performance of individual alternative investments will differ from that of the index. Equities represented by the S&P 500 Index. Fixed Income represented by the Barclays US Aggregate Bond Index. Traditional 60/40 Portfolio represented by 60% S&P 500 Index and 40% Barclays US Aggregate Bond Index. An investment cannot be made directly in an index.
2 As of Aug. 24, 2015, every Morningstar Alternatives Fund Category is out performing the S&P 500 Index on a year-to-date basis.
3 Stocks are related if they are driven by the same fundamental factors; for example, two stocks from the same industry.
This article was written by Walter Davis, Alternatives Investment Strategist at Invesco.