U.S. equities experienced their worst start to a new year, and the poor performance may have pushed some investors to consider alternative investments and related exchange traded funds that could provide more stable returns in volatile conditions.
Potential investors should be aware that alternative 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.
Alternatives would be used in an investment portfolio to provide diversification from equities or better protect an investor from downside risks in stocks while bringing some upside participation. Nevertheless, these alternative strategies may include equity exposure, so in a widespread sell-off, investors should not expect complete immunity.
For instance, the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which tries to generate capital appreciation through short sales of domestic equities, rose 13.8% year-to-date and recently hit a 52-week high while the S&P 500 Index declined 9.0%.
Additionally, managed futures held up so far this year. For instance, year-to-date, the WisdomTree Managed Futures Strategy Fund (NYSEArca: WDTI) was up 0.7%, First Trust Morningstar Managed Futures Strategy Fund (NYSEArca: FMF) was 1.4% higher and ProShares Managed Futures Strategy (NYSEArca: FUTS) was down 0.6%. Managed-futures strategies tend to have very low, and even negative, correlations to the stock market. The strategy utilizes a number of futures contracts in commodities, energy, agriculture, currency and debt.
Other alternative strategies showed better performance than the broader equities market so far this year. For instance, the First Trust Long/Short Equity ETF (NYSEArca: FTLS) decreased 6.1%, ProShares RAFI Long/Short ETF (NYSEArca: RALS) was 1.3% lower and QuantShares U.S. Market Neutral Anti-Beta Fund (NYSEArca: BTAL) gained 8.3%. These long/short strategies take both long positions in U.S. equities and pare bets with short positions.
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) and ProShares Morningstar Alternatives Solution ETF (NYSEArca: ALTS), which dipped 1.4% and 4.5% year-to-date, respectively. 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.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.