The Perils of Some Alts

Having low or negative correlations to stocks isnít a good enough reason to add an alternative asset to a clientsí portfolio;†they must also have positive expected long-run returns.

Get access to this article and thousands more...

All Financial Planning articles are archived after 7 days. REGISTER NOW for unlimited access to all recently archived articles, as well as thousands of searchable stories. Registered Members also gain access to exclusive industry white paper downloads, web seminars, blog discussions, the iPad App, CE Exams, and conference discounts. Qualified members may also choose to receive our free monthly magazine and any of our daily or weekly e-newsletters covering the latest breaking news, opinions from industry leaders, developing trends and growth strategies.

Already Registered?

Comments (2)
I would be hesitant to dismiss managed futures funds out of hand. According to BarclayHedge, the Barclay CTA index has gained an annualized 10.23% since January 1980.

Managed futures provide particularly effective diversification during stressed equity markets such as in 2008 when managed futures was one of the few strategy categories to do well during the crisis.

The strategy generally has higher volatility than some other strategy categories but managed futures typically has low correlation to other asset classes and strategies. Used prudently as one part of an investor's portfolio, managed futures can add valuable diversification and add to a portfolio's total return over time.
Posted by William D | Thursday, June 05 2014 at 2:54PM ET
I would agree with William. While recent year (broadly) has been difficult for managed futures mandates, there are a number of trend and counter trend approaches that have produced the returns (after fees) one would expect from this asset class. To state that not a penny has been made is flat out false and misleading. Even simple rebalancing strategies across a diversified commodities futures portfolio over time has been able to generate meaningful positive returns.

On the market Neutral side, don't confuse zero beta with no market exposure. What you described would assume you are taking a net zero market exposure through a broad based index approach and therefore assuming earning the risk free rate on the cash position of the portfolio. A zero beta exposure or loosely net zero market exposure could also be accomplished with equal short and long positions in individual securities where value could be added through both positions - zero beta while capturing manager alpha through security selection. As a group, like managed futures, recent performance as a group has been mediocre. However, still more than the risk free rate with managers over the prior 5-years generating returns north of 5% per year. It can be difficult to see the benefit and value they add to a portfolio when viewed in isolation and during periods of strong performance. I would encourage you to see what adding these strategies to a portfolio of traditional assets does from both a performance and risk adjusted performance basis.
Posted by Steven S | Thursday, June 05 2014 at 4:59PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

Already a subscriber? Log in here