Updated Friday, July 25, 2014 as of 2:18 PM ET
The Rapid Rise of Alts
Tuesday, July 1, 2014
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Most alternative investment assets are held by institutional investors or by accredited, high-net-worth individuals and, according to Preqin, now total $6 trillion. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.

But alternative investments arenít just for institutions any longer. According to Morningstar alternatives investment analyst Josh Charney, $38.7 billion flowed into alternative investment mutual funds and ETFs over the year ended April 30, 2014. Thatís roughly a 36% increase over the prior year and more than a 100% increase over the past two years. Alternative fund assets now comprise about $150 billion. Still, itís a drop in the bucket compared to the total of all long-term funds of $11.3 trillion.

The appeal of alternative investments is that they will zig (rise) when the stock market zags (plunges), thus providing stability to our clientsí portfolios. Charney attributes the rapid growth to investors looking for more diversification and for lower volatility compared to stocks.
Morningstar categorizes alternatives in three basic buckets:

  • Non-traditional asset classes (such as commodities and currencies).
  • Non-traditional strategies (such as shorting or hedging).
  • Illiquid assets (private equity, private debt).

Morningstar notes that once an alternative investment becomes mainstream (such as REITs), it may no longer be considered an alternative. To be considered a good alternative investment, Morningstar says a category should produce positive, risk-adjusted returns over a reasonable time frame, and exhibit low correlations to traditional investments.

Are alternative investments good for our clients? Though having low or negative correlations to stocks may be great, they also have very high costs. There is also the question of whether we are arriving too late to the game, since we know that investing after something has been discovered typically doesnít end well.

Over the course of this series, I'll examine the role of alternatives in clientsí portfolios. Looking at past performance as well as future expected returns, Iíll offer some opinions as to which ones to consider and which to steer clear of.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

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(6) Comments
Having a low correlation between two investments does NOT mean one will zag when the other is zigging. Could just as easily happen as not happen, when the correlationship is zero. Few exist at that level. Most have some to still quite bit of positive correlation, which means their tendency is to move similarly but not exactly the same. Alts can be very beneficial for a portfolio, but don't falsely promise their relationships. Norm Boone
Posted by NORMAN | Sunday, June 01 2014 at 2:33PM ET
Having a low correlation between two investments does NOT mean one will zag when the other is zigging. Could just as easily happen as not happen, when the correlationship is zero. Few exist at that level. Most have some to still quite bit of positive correlation, which means their tendency is to move similarly but not exactly the same. Alts can be very beneficial for a portfolio, but don't falsely promise their relationships. Norm Boone
Posted by NORMAN | Sunday, June 01 2014 at 2:33PM ET
Having a low correlation between two investments does NOT mean one will zag when the other is zigging. Could just as easily happen as not happen, when the correlationship is zero. Few exist at that level. Most have some to still quite bit of positive correlation, which means their tendency is to move similarly but not exactly the same. Alts can be very beneficial for a portfolio, but don't falsely promise their relationships. Norm Boone
Posted by NORMAN | Sunday, June 01 2014 at 2:33PM ET
Having a low correlation between two investments does NOT mean one will zag when the other is zigging. Could just as easily happen as not happen, when the correlationship is zero. Few exist at that level. Most have some to still quite bit of positive correlation, which means their tendency is to move similarly but not exactly the same. Alts can be very beneficial for a portfolio, but don't falsely promise their relationships. Norm Boone
Posted by NORMAN | Sunday, June 01 2014 at 2:33PM ET
Having a low correlation between two investments does NOT mean one will zag when the other is zigging. Could just as easily happen as not happen, when the correlationship is zero. Few exist at that level. Most have some to still quite bit of positive correlation, which means their tendency is to move similarly but not exactly the same. Alts can be very beneficial for a portfolio, but don't falsely promise their relationships. Norm Boone
Posted by NORMAN | Sunday, June 01 2014 at 2:33PM ET
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