Exchange traded funds that replicate hedge fund strategies or track liquid alternatives are a good way to diversify a traditional equity and fixed-income portfolio to lower the potential negative effects of a volatile market ahead.

“Current equity market levels and the prospect of rising rates may mean lower returns and higher volatility in traditional portfolios,” Yazann Romahi, Portfolio Manager and Head of Global Multi-Asset Research in the Multi-Asset Solutions Team at J.P. Morgan Asset Management, said on the recent webcast, Look to Alternatives as Traditional Stocks, Bonds Run on Fumes.

After an equities generated an almost 200% return from the lows of 2009, investors should not expect the good times to last forever and brace for single digit returns with potentially greater volatility ahead. Meanwhile, the fixed-income market has enjoyed a multi-decade bull run as yields pushed toward record lows, but its is now more likely that interest rates will go up and pressure debt securities.

In a survey of financial advisors attending the webcast, the majority of respondents, 42.0%, pointed to global uncertainty as the biggest point of concern over the next 12 months, followed by 39.0% pointing to bear market in equities and 19.0% worrying about rising interest rates.

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Alternatively, investors can look to liquid alternatives that can produce diverse investments strategies, attractive risk-adjusted return potential, downside mitigation and potentially reduce market sensitivity.

Mark Matthews, Investment Research Analyst at CLS Investments, points to a number assets that may fall under the liquid alternatives category, including commodities, currencies, convertible bonds, preferred stocks and VIX options, along with other hedge fund-like strategies.

Jillian DelSignore, Executive Director and Head of ETF Distribution at J.P. Morgan Asset Management, explained that once an investor has a sense of his or her investment outlook, one would need to decide what type of alternative strategy to adopt.

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