Using Alternatives in Portfolios
Senior Investment Strategist Esty Dwek explains how alternatives can reduce correlation and improve diversification.
Alternative investments include assets like property, private equity and managed futures. In the investment landscape of 2019, where interest rates are expected to keep rising, central banks are reducing their stimulus and market volatility is increasing, alternatives can provide a different perspective on markets, risk and investment returns.
Some alternative strategies have the potential to boost portfolio diversification, which can help to counteract the risk that poor performance by any single asset class or investment strategy might pose to a portfolio’s overall health. Many alternatives are designed to have a low correlation to stocks and bonds, meaning they seek to move independently of how these asset classes might behave in various market conditions.
Managing portfolio risk by seeking to act as a potential volatility buffer during episodes of market turbulence is another potential use of some types of alternative strategies. Some alternatives are designed to dampen the negative effects of market volatility if and when it occurs.
Amplifying portfolio returns or delivering returns beyond the benchmark are other potential abilities of alternative strategies. Some alternatives can seek additional returns by taking on more risk. The sophisticated techniques used by alternatives can magnify both a gain or a loss.
What types of alternative strategies are available?
Alternative investments can be either liquid or illiquid. The more illiquid, longer-term positions tend to have higher return prospects – but also the liquidity costs that go with it. Examples of illiquid alternatives include private equity and real estate, which generally impose limits on withdrawals. Essentially, liquid alternatives can be more readily exchanged or sold than illiquids. They tend to have more of an absolute return focus – exploiting arbitrage opportunities or focusing on relative value strategies –seeking to generate returns irrespective of the overall direction of markets. There’s a diverse range of alternative strategies available across the risk-return spectrum. These strategies can employ a number of additional tools that can help improve diversification, risk management and potential returns. These strategies include:
Arbitrage & Absolute Return
Illiquid InvestmentsFor information and insights related to illiquid investments and institutional solutions visit: https://www.im.natixis.com/en-institutional/topic/alternatives
Natixis’s James Beaumont talks about the increasing demand for alternative investments and the role that both liquid and illiquid alternatives can play in client portfolios.
Institutions are finding ways not available in public markets to fortify portfolios, including private equity, real asset debt and infrastructure.
A look at how funds that rely on hedge fund beta have the potential to provide an additional source of return and portfolio diversification.
The author examines the importance of market size in trend following strategies and highlights the significance of the size factor across managers in 2018.
Diversification does not guarantee a profit or protect against a loss.
Managed Futures use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors.
Hedge funds are unregistered private investment pools that are often illiquid and highly leveraged, and may engage in speculative investment practices. Hedge funds may be more volatile than investments in traditional securities and may not be suitable for all investors. Volatility management techniques may result in periods of loss and underperformance, may limit a portfolio’s ability to participate in rising markets and may increase transaction costs.
Real estate investing may be subject to risks including but not limited to declines in the value of real estate, risks related to general economic conditions, changes in the value of the underlying property owned by the trust, and defaults by borrowers.
Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs.
Short selling is speculative in nature and involves the risk of a theoretically unlimited increase in the market price of the security that can, in turn, result in an inability to cover the short position and a theoretically unlimited loss.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.
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