It was not long ago that the term alternative investments prompted images of exotic venture capital, private equity and hedge fund investment strategies frequented almost exclusively by very wealthy households and institutional investors.

Since a lot these investments typically are more opaque than individual stocks, mutual funds and bonds, they seemed intractable and arcane.

All of that should change, and investors should be able to understand those non-correlated products well enough to try handling a portfolio for themselves if they choose, according to Michael Kane, co-founder and chief investment officer of Hedgeable. 

“We saw that there was a huge chunk of the market, people who cannot access hedge funds and institutional, risk-managed strategies, who wanted these,” Kane said in a recent telephone interview.

Kane and his twin brother, Matthew, envisioned a service similar to the discount brokerage offerings from Charles Schwab. It offers users a menu of 20 exchange-traded fund and stock-based investment strategies, which it manages. Investors can get detailed analytics on the funds, withdraw or deposit funds to accounts and change allocations. If they run aground with questions, they can access a round-the clock support chat for urgent requests. Most individual clients pay a wrap fee between 75 and 100 basis points for the Hedgeable service.

Clearly, those clients are bringing their questions to advisors, because inquiries from the industry have picked up. Hedgeable has signed up 12 registered investment advisory firms as clients, which typically manage between $20 million and $100 million on the platform, Kane said. In those relationships, RIAs can manage accounts for clients. Firms can also use Hedgeable’s sub-advisory services, wherein Kane’s group will license the strategies to advisors, who can then put their firm’s logos on statements and other materials to clients.

Unlike the financial market crisis that followed Lehman Brothers’ collapse in  

2008, investors are not staying put on the sidelines en masse, hording cash until volatility subsides, say some industry professionals. Instead, they want strategies that hedge risks against the amazing highs and lows in the equity markets.

Advisors at Kohlhepp Investment Advisors, based in Doylestown, Penn., have been discussing alternative investments with its clients since the onset of the last market downturn, Ed Kohlhepp, Sr., said. The firm does not subscribe to Hedgeable’s services, but have been steering its clients toward alternatives and other defensive products for at least a couple of years.

“We have been positioning our clients more defensively for years in more alternative products,” Kohlhepp said. “It can mean anything from commodities to managed futures to hedge funds.”

At Kohlhepp, advisors tap into absolute return strategies, and do so in two main ways. It buys variable annuities with living benefits, uses the Genworth Preservation, whose main goal is to preserve capital in each calendar year and make money in good market years.

Advisors also continue to warm up to variable annuities, albeit slowly. It has been about seven months since LPL Financial launched a fee-based variable annuity platform. Financial Planning wrote about the platform last February. The open-architecture platform offers advisors VAs from Allianz Life Insurance Co. of North America and Allianz Life Insurance Co. of New York, AXA Equitable, Lincoln National, Prudential Annuities and Sun Life Financial.

Prudential says sales results have been modest from the platform, but executives there say that the RIA segment is still warming up to the product.

“We are making steps in the right direction, but more has to be done on our part,” Bruce Ferris, head of variable annuity sales and strategic account management at Prudential Annuities, said. “We have to engage the advisor on his or her terms, not ours, and construct a product that is complementary to the practice, instead of asking them to learn traditional variable annuity structures.”

Overall, though, VAs are making huge leaps forward in terms of sales. At the end of the first quarter, according to Morningstar data, new annuity sales were up 23.2%. Also, carriers introduced new step-up methods, long-care term riders, the Chicago-based research firm said.

These are economic times that fray nerves, test long-term investing discipline and bring on severe cases of vertigo, depending on how the equity market is trading in a particular week. Advisors will not have all of the answers for their clients. It might help advisors to know that as investors traverse the current investing waterways, the industry seems willing to help them update the tools at their disposal. 




Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access