With volatility shaking up the markets, investors and financial advisors may consider including some alternative investments into an investment portfolio to help smooth out the ride.
While the equities market are trading near full value at best and bonds are being threatened with the prospect of rising interest rates, investors may want to take a look at alternatives.
“What do you do in that environment for returns?” Nadia Papagiannis, director of alternative investment strategy at Goldman Sachs Asset Management, asked InvestmentNews. “We think alternatives are the answers to that.”
The equities market experienced a wild swing in late August, but alternative investments provided some with a more stable return during the sudden market correction. [Alternative Investments Provided Portfolio Stability During Recent Correction]
However, advisors have not pulled the trigger on alternatives. According a Aite Group study that surveyed 338 advisors in 2014, alternative investments represented only 5% of products advisors chose to include in client portfolios.
Papagiannis pointed to four hedge fund-esque strategies that could help investors diversify a portfolio, including equity long-short; relative value, or the difference between two similar securities; event-driven, which are similar to merger funds trying to cap profit from corporate events; and tactical macro, which adapts to ongoing trends.
Investors can also tap into these alternative strategies through specialized ETFs. For instance, the First Trust Long/Short Equity ETF (NYSEArca: FTLS) and ProShares RAFI Long/Short ETF (NYSEArca: RALS) are two long-short strategies that take both long positions in U.S. equities and pare bets with short positions.
To capture the merger-arbitrage strategy, the Index IQ Merger Arbitrage ETF (NYSEArca: MNA), Credit Suisse Merger Arbitrage Index ETN (NYSEArca: CSMA) and ProShares Merger Arbitrage ETF (NYSEArca: MRGR) provide investors with a diversified approach to a group of takeover targets. The ETFs employ a type of alternative, “directional hedge fund strategy” called merger arbitrage. Specifically, the funds capture the spread or difference between a stock’s trading price before a deal is announced and its eventual takeover price. [ETFs to Capture the Rise in M&A Activity]
Additionally, the recently launched IQ Leaders GTAA Tracker ETF (NYSEArca: QGTA) and the AdvisorShares Morgan Creek Global Tactical ETF (NYSEArca: GTAA) both follow tactical asset allocation strategies that adapt to changes in the market environment. GTAA takes a discretionary macro approach in its global tactical portfolio.
Investors can also take a look at ETFs that track a basket of alternative investment strategies. For instance, the newer PowerShares Multi-Strategy Alternative Portfolio (NasdaqGM: LALT), ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS) and IQ Hedge Multi-Strategy ETF (NYSEArca: QAI). 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. QIA provides a diversified mix of alternative strategies, including multiple hedge fund investment styles, such as long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. [Alternative Investment ETFs Are Increasingly Popular]
For more information on alternative strategies, visit our alternatives category.
Max Chen contributed to this article.
CORRECTION: Update on AdvisorShares Morgan Creek Global Tactical ETF.