A tumultuous August showed equity investors that even in a bull market environment, short-term risks and uncertainties can strike at any moment.
Consequently, investors may consider incorporating a small allocation to alternative exchange traded fund strategies to limit the potential fallout.
“August saw the Dow cross 22,000 for the first time, driven by strong earnings, low interest rates, and the hope that Washington might finally move forward on tax reform,” Salvatore Bruno, IndexIQ’s Chief Investment Officer, said in a note. “Working against this advance has been the geopolitical situation, as tension with Korea ratcheted up. This, in turn, resulted in higher levels of volatility, something we expect to continue as we move into September which is often a challenging month for the markets.”
In the current market environment, with equities near all-time highs and interest rates still below historical averages, alternative investments maybe a solution for investors struggling with how to make money while still managing risk. Alternative investments as a basket of securities can offer greater return potential than traditional bonds, lower volatility than equities, and a lower correlation to both.
While U.S. equity markets stumbled, alternative equity strategies stood out. For example, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI) gained 0.67% over August. QAI 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.
The IQ Hedge Long/Short Tracker ETF (NYSEArca: QLS), which is designed to mirror hedge funds’ long/short strategies, returned 0.56% last month.
The IQ Hedge Macro Tracker ETF (NYSEArca: MCRO) was up 0.43% in August. MCRO tries to replicate the risk-adjusted return characteristics of a global macro strategy that takes long and short positions on various assets based on the overall economic and political views of a number of countries or their macroeconomic principles.
The IQ Hedge Market Neutral Tracker ETF (NYSEArca: QMN), which tries to give consistent returns in any market with low volatility, returned 0.23% last month. The ETF is the first to use a market neutral strategy by copying market neutral hedge funds.
Related: ETF Performance Report: August 2017
During periods of market selling in traditional assets, these types of liquid alternative strategies can experience lower drawdowns or even positive returns, which may help buoy an investment portfolio during troubled times.
Potential investors, though, should be aware that these types of 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.
For more information on liquid alts, visit our alternatives category.