Record volatility in recent weeks means more clients are looking for downside protection, and non-correlated assets are a major way to go. But too many alternative asset classes failed to perform as expected in the market implosion in 2008, leaving investors frustrated and skeptical. What's to be done? Stephen Todd Walker, formerly with Deutsche Bank Alex.Brown and now managing director at Oppenheimer & Co., was named to Barron's list of top 1,000 advisors due in part to his strategic (and successful) use of alternatives. His new book, "Wave Theory for Alternative Investments," takes on three asset classes in particular: venture capital, commodities and hedge funds.
He sat down with Investment Advisor to talk about the wave theory: what it is and how members might benefit from understanding its ebb and flow.
What's the elevator pitch for the wave theory?
Years ago, I was with Deutsche Bank Alex.Brown, which is a firm that is very involved with alternatives. I noticed if I added alternatives it decreased risk and increased return. I also noticed, over and over again, the same patterns seem to revert to the mean. For example, if I was to say I know someone who bought a house, flipped it and bought two more houses with the proceeds and then overextended and went bankrupt, you'd say, "Sure, that was, like, three years ago." Actually, I was referring to 1922, when there were 30,000 realtors in the Miami-area alone. Similar patterns have happened in real estate between then and now. So that's an example of what the wave is: patterns, cycles and trends that occur in different alternative asset classes.
About the only asset class that performed to expectations as truly non-correlated were managed futures. Given that generally poor performance, does the term "alternative investments" turn the public off?
Depends on the time period you're talking about. Many didn't perform to expectations. But managed futures were up 14.09% during the worst of the last market downturn, and hedge funds were down significantly less than the equity markets as the equity market got creamed. And those were abnormal times.
But isn't that what alternative investments are for, to protect against abnormal markets?
