Alternative Strategies for Fund Allocation



Today most financial professionals believe that retail investors should have access to alternative investments.

Moreover, it is considered that the traditional mix of stocks and bonds is no longer the safe bet it once was, the same can be said for the classic 60/40 portfolio.

Investment advisors recommend now that clients who meet accredited investor requirements should consider a shift towards alternatives.

Financial professionals believe that given the market volatility, alternatives hedge against both the bond and equity markets allowing clients to generate returns.

Advisors have watched as most so-called alternatives – private equity, private credit, private real estate, private preferred stocks – have gone up this year.


Educational Strategies


An educational component is an important part of integrating alternative strategies in investment schemes widely used by advisory firms.

Still, for many advisors education remains one of the biggest barriers to investing in alternatives. And this needs change.

Financial professionals have to consider the risk associated with alternative strategies, particularly the unregistered versions that are still limited to wealthy investors. They need to be extremely careful when looking at alternative investments and the client has to fit a certain profile.

Another problem is that alternative investments are not for the average American investor, and even if they do make sense, people have to be wary during times of volatility.

Now, most alternatives are the privilege of institutions and wealthy individuals, but these restrictions could soon be lifted.

Most professionals believe the Securities and Exchange Commission’s definition of accredited investor should be updated because it is prohibitively high.


Liquid Diversification


To diversify a funds allocation advisors should take note of liquid alternatives.

The key to allocating funds comprised of alternative strategies is knowing what to expect and understanding the investment options.



With stocks and bonds correlating in a move toward the floor, retail investors have been rediscovering the benefits of diversifying into mutual funds and ETFs that employ alternative strategies.

Even though financial advisors, in general, continue to express mixed views about the broad category of so-called liquid alternative funds, proof of the trend can be found in the flow of investor dollars.


Bullish on Liquid Alt Funds


Looking at some of the standout performances by funds making up the broadly diverse liquid alts universe, Morningstar senior analyst Bobby Blue suspects there’s “a bit of performance-chasing going on.”

At the same time, he considers that some of the strategy types have proven themselves to be effective diversifiers.

Blue cited equity market neutral which goes long and short across a range of asset classes, and systematic trends like managed futures as some of the stronger liquid alt strategies this year.


With the S&P 500 Index hovering over a bear market, any glimmer of hope is welcome. So it’s no surprise investors have their eye on the best performing liquid alt funds.

And, according to Blue, “it’s absolutely still a good time to invest in this category.”


Strategic Allocation


However, to invest in liquid alt funds clients need to understand their structure and to work on strategy.

“These strategies can diversify away from stocks and bonds, and that’s not something you want to try and time,” Blue said. “You need to carve out a strategic allocation for alternatives and understand the role they can play.”

On that note, Paul Schatz, president of Heritage Capital, agrees.

“Liquid alts has become that catchall phrase for allowing the public access to previously hedge-fund-only strategies,” he said. “They are intended to offer non-correlated funds and be all-weather, but I haven’t seen a consistent definition or how to properly categorize them.”

Tim Holsworth, president of AHP Financial, is also sitting this one out.

“I’ve had lots of experience and therefore I don’t use them, because I’ve never seen anybody that could successfully pull it off,” he said. “Generally speaking, it’s safe to say the industry has a helluva time playing the shorts successfully because there’s a major long bias in the markets.”

But Ashton Lawrence, a partner at Goldfinch Wealth Management, continues to be a believer in the diversifying benefits of alternatives.



“We utilize some alternative investments as bond proxies since their volatility, fluctuations and standard deviation are similar to some bond funds,” he said. “Conversely, we utilize some alternative investments as a diversifier to the equity holdings.”


Here, at RiXtrema, we help financial professionals improve their clients’ portfolios by carving out a thoughtful, appropriately sized position for each fund that fits the client’s risk tolerance and risk capacity. Feel free to learn more about our Portfolio Crash Testing tool on our main website.



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