With stocks and bonds declining in unison this year, investors were forced to consider other asset classes. Fortunately, the broader spectrum of alternative ETFs stood firm for investors in 2022.
That’s all the more impressive when considering that some traditional alternative assets, such as gold and real estate investment trusts (REITs), faltered at the hands of six interest hikes by the Federal Reserve.
“Alternative funds are meant to provide diversification—mainly playing defense—in a portfolio by having returns that show little relationship to both stocks and bonds. To accomplish this, alternative funds use a wide variety of sometimes complex strategies,” noted Morningstar analyst Katherine Lynch.
While alternative funds are undoubtedly facing headwinds this year, including the aforementioned struggles of gold and REITs and epic declines in the cryptocurrency market, the reality is that the average alternative fund is far outpacing the double-digit losses sported by many aggregate bond strategies.
“Among alternative categories, systemic trend funds are the best-performing group. The third-largest category of alternative strategies with $27 billion in assets, systemic trend funds are up an average of 17.15% so far this year. Event-driven funds, which hold $21 billion, are down 1.69% on average,” added Lynch.
That’s testament to the depth of the alternatives universe and a reminder to novice investors that they should look beyond the basics and consider strategies such as long-short, market-neutral, merger arbitrage, and trend-following strategies, among others. In fact, both merger arbitrage and trend-following are delivering for investors this year while stocks and bonds are sliding. Trend-following funds are benefiting from obviously slumping markets.
“Systematic, or trend-following funds, are top performers among the alternatives group in 2022 with the average fund in the category up 17.2% this year,” according to Lynch. “Systematic trend funds mainly implement strategies designed to identify and profit from short-term trends across a variety of markets, including stocks, bonds, currencies, and commodities. These funds do especially well when there are clear, strong moves in the markets either up or down.”
For investors new to alternative funds, it’s also worth noting that there multi-strategy products on the market. As the phrase implies, these funds combine multiple alternative strategies. Broadly speaking this year, multi-strategy alternative funds are performing less poorly than broad-based equity funds, though not setting the world ablaze.
“Combining strategies has produced muted returns, but is still better than those of the broad stock and bond markets. The average multi-strategy fund is down 1.49%,” concluded Lynch.
For more news, information, and analysis, visit the Alternatives Channel.
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.