Financial Adviser – In an environment in which equities are near record highs and most areas of credit no longer offer compelling risk/reward profiles, many advisors are struggling with the same challenge: how to construct a portfolio that can generate an attractive return and protect capital under a variety of market environments. Alternatives can be the third leg of the stool that can help achieve both of those objectives.
It is imperative to truly understand the underlying exposures of the alternative strategies used to make an informed decision about how a fund could behave in different environments and as part of a larger portfolio – particularly as it relates to hedging rising interest rates. A clear example of this came when “taper talk” arose initially in May-June 2013. Credit markets reacted sharply to the news, and some strategies that have been labeled as “alternative,” such as risk parity, exacerbated the problem in many portfolios due to the embedded rate risks in this strategy. This is why looking under the hood in liquid alternatives is critical as many very different strategies are thrown into the “alternative” bucket.