Regardless of last month’s lights-out performance for virtually every risk asset (see October 2013 indexes performance chart below), investors are scared. Many think that equities have risen too much, too quickly. Others think that interest rates are poised to shoot higher. Instead of holding excess cash, advisors would likely add much more value in client accounts if they addressed these concerns directly by using alternative investments.
What are their biggest fears? According to a survey taken of the 400 professional investors at the Credit Suisse annual Megatrend Conference in New York on October 18th, political dysfunction in Washington is the biggest concern (53%), followed by geopolitical tensions (31%), inflation (8%) and currency wars (8%).
These risks have several things in common. Each is associated with increased market volatility, an environment that is ideal for long-short equity funds and managed futures products. Geopolitical tensions and currency worries are best addressed with long-short debt funds and convertible bonds, due to these products’ ability to gain regardless of the direction of interest rates. As for inflation, commodity funds are the best bet.
Consider this a teaser, as I will delve into the smart, prudent use of alternatives in greater detail in a ThinkAdvisor webinar on risk and diversification on Nov. 12. And look for a feature article on how advisors can use alternatives in client portfolios in the January issue of Investment Advisor.