Recent equity market swings reveal the risks of chasing after returns in an extended bullish environment. Consequently, investors should consider alternative investment options and exchange traded funds to diversify a portfolio against sudden turns.
In February, the market euphoria quickly soured and officially entered a correction as investors grew increasingly wary of rising interest rates. More recently, President Donald Trump’s surprise focus on tariffs and potential action against China have fueled concerns of a global trade war, further dragging on markets after a recent bounce.
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The heightened volatility goes to show that as the current bull market extends, traders are susceptible to sudden turns that could erase portfolio gains. With volatility depressed and growing complacency, investors are increasingly fanning the flames of an extended rally, ignoring the potential for a sudden turn.
History has shown that sudden swings may happen without notice. However, investors may consider liquid alternative strategies and funds that were designed with exactly this in mind. By investing in non-correlated asset classes, they offer investors continued market exposure, paired with the potential to diminish downside risks.
An Alternative ETF Idea
For example, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI), the largest alternative strategy ETF on the market, 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.
Over the past month, QAI only dipped 1.7%, whereas the S&P 500 has gained -5.6%. Nevertheless, potential investors 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.
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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.
For more information on alternative strategies, visit our alternatives category.