Exploring Alternative Investments

Using Alternatives in Portfolios

Senior Investment Strategist Esty Dwek explains how alternatives can reduce correlation and improve diversification.

Alternative investment strategies allocate to asset classes other than traditional stocks, bonds, and cash. In today's challenging investment landscape, alternative investments can provide a risk and return profile that behaves independently of more conventional assets. For investors choosing among the range of alternative strategies available, risk tolerance and financial goals are important considerations.

Why Alternatives?

Alternatives have the potential to provide portfolios with diversification, risk management, and non-traditional sources of return. These non-traditional investments can involve unique risks that may be different than those associated with traditional investments, including illiquidity and the potential for amplified losses or gains.1

Diversification3

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.

Risk Management

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.

Return Enhancement

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.


Strategies

Alternative investments can be either liquid or illiquid. Liquid alternatives can be more readily exchanged or sold than illiquid alternatives. Examples of liquid alternatives include mutual funds and ETFs, which can be redeemed or sold on any business day. Examples of illiquid alternatives include private equity and hedge funds, which generally impose limits on withdrawals, have higher investment minimum and net worth requirements, and may not be suitable for all investors. Alternative investments may use a variety of different strategies, depending on their objective

Managed Futures

An account or mutual fund in which futures contracts are actively managed by financial professionals. Futures are financial agreements that obligate the buyer to purchase an asset, or the seller to sell an asset, at a predetermined future date and price. These assets can include a physical commodity, such as gold or agricultural products, or a financial instrument, such as contracts in the interest rate or currency markets.

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 often do not perform as well in bull markets or in choppy markets, are highly speculative, and are not suitable for all investors.

Global Macro

A hedge fund or mutual fund that seeks to base its holdings on manager analysis and interpretations of a country’s macroeconomic principles, including large-scale events like economic growth or recession. Global macro strategies have the potential to place any type of trade they chose across a range of securities.

Long/Short Equity

Involves buying stocks expected to increase in value and short selling2 stocks that are expected to decrease in value. This strategy is often associated with hedge funds.

Absolute Return

Seeks to produce a positive return that is independent of traditional market benchmarks. These strategies are not intended to outperform stocks and bonds during strong market rallies. While they may underperform during periods of strong market performance, they generally seek a positive return in flat markets or down markets.

Real Estate

Buys and sells properties, including land or buildings, in pursuit of returns. Can also include real estate investment trusts (or REITs) — companies that own, operate, or finance real estate.

Low volatility equity index-based funds

Types of mutual funds that seek to manage volatility through a portfolio of diversified common stocks that closely tracks an index while incorporating the use of options.4 Depending on the approach and desired outcomes, options can protect or enhance investment returns in rising, falling or neutral markets.

Private Equity

Typically for higher net worth or institutional investors, invests directly in private companies or participate in buyouts of publicly-listed companies.

Private Debt

Makes investments in debt — including loans and corporate bonds — that is typically taken on by individuals or private businesses.


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1 Investors should fully understand the risks associated with any investment prior to investing.

2 "Long" or "long position" is the purchase of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. "Short" or "short position" is the sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.

3 Diversification does not guarantee a profit or protect against a loss.

4 An option contract that may be exercised at any time between the date of purchase and the expiration date.

IMPORTANT RISKS
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. Call options can reduce the risk of owning stocks, but it can limit returns in a rising market. The fund's use of options in managing volatility or in the pursuit of investment returns may not be achieved. Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss. 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 and are as of 11/27/2018. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus on our website containing this and other information. Read it carefully.


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