For instance, a hedge fund index replication technique would use historical statistical relationships to replicate historical performance of a broad hedge fund universe. Alternative beta uses expanding systematic, rules-based investing of various hedge fund styles. A global macro approach is a macro-driven investment style that invests tactically across stock, bonds, currencies and commodities across the global. A multi-manager provides access to highly skilled hedge fund managers.
“Have clear expectations for what you want out of your alts allocation overall relative to your current starting point,” DelSignore said. “Where do you have the biggest risk in your portfolio today? Is it equity risk, interest rate or credit risk, or maybe both?”
In the survey of financial advisors, 49.0% revealed their preference for allocating a greater portion of their portfolios to alternative investments by the end of 2016. However, 21.0% of advisors said they required more information, which suggests that the industry still needs to reach out to further educate investors about the benefits of liquid alts.
Large institutional-sized investors have traditionally turned to hedge funds as a way to gain exposure to these alternative strategies. However, hedge funds come with high management fees of 1% to 2% on top of a performance fee of as much as 20% of annual gains. Luckily for ETF investors, there are now a number of ETFs that specifically deliver hedge fund-esque strategies.
“Hedge fund strategies can provide several key benefits to clients, but fees can meaningfully reduce return capture,” Romahi said. “Alternative ETFs seek to provide low cost access to hedge fund strategies and capture their unique attributes.”
For example, investors can look to the recently launched JPMorgan Diversified Alternatives ETF (NYSEArca: JPHF), J.P. Morgan’s first actively managed ETF to hit the market. The fund combines various hedge fund-esque, alternative investment strategies in an easy-to-use ETF wrapper. Specifically, JPHF will include equity long/short, event driven and global macro based strategies. The ETF comes with a 0.85% expense ratio.
Financial advisors who are interested in learning more about alternative investment strategies can watch the webcast here on demand.