By Cynthia Crandall via

Investors have been fortunate to experience one of the longest bull markets on record. However, the recent stock-market surge—manifested by the Dow Jones Industrial Average’s record close above 22,000 points over the summer and the S&P 500 surpassing 2,500 points earlier this month has caused many to question whether or not valuations are stretched. This development, along with expectations of additional interest-rate increases going forward, has cast a favorable light on the downside protection properties of alternative investments.

Liquid alternatives, which provide access to alternative investment strategies in a mutual fund structure, have had positive returns during the most recent bull market over the past eight years, though returns have been muted as compared to long-only products. As a result, some investors and advisors are wary of this asset class. However, while some liquid-alternative strategies may be complicated to understand, there is no reason to be frightened of liquid alternatives as a whole, as they can be a great diversifier in a multi-asset class portfolio and potentially reduce client drawdowns.

Here are three key points to keep in mind about liquid alternatives:

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