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Portfolio > Alternative Investments

Alternatives and Advisors

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“RIAs perform the most sophisticated due diligence,” Marc Zeitoun of Guggenheim flatly stated in a conversation during the Schwab Impact conference in San Francisco. Zeitoun was talking about how his firm has long been an educator of advisors when it comes to the inside baseball of alternatives and their role in client portfolios.

“Alternatives” have been on some advisors’ investment radar screens, and that interest has grown since the financial crisis, which has also driven advisors’ increased interest in doing their own due diligence.

Sure, “education” is sometimes code for salesmanship, but advisors are not fools: You can clearly see the difference between a sales pitch and true education. In the 12 years I’ve been at Investment Advisor, we’ve spotlighted a mutual fund each month, but I would never believe that you would invest in one of those funds on your clients’ behalf merely because we think a fund manager is performing well or has an interesting story to tell. That’s where your due diligence begins, not ends.

Words can illuminate or obfuscate, and nowhere is that more obvious than when it comes to evaluating an alternative investment. At the same Schwab show, we convened a panel of alternatives experts—Andy O’Rourke and John Cadigan of Direxion Funds; Bob Worthington of Hatteras Funds; Brian Watson of SteelPath; and Rick Lake of Aston/Lake Partners. Yes, they are advocates for their own vehicles and the space itself, but they spoke in an objective way on how advisors view and evaluate alternatives (see an extended report at AdvisorOne).

Lake said advisors are concerned about three things: risk management, returns and diversification. In risk management, they want a smoother ride. With return, they are “desperate for a source of returns in an unkind world. With diversification, they receive better risk-adjusted returns with our strategies than many traditional sources.”

Worthington said that advisors want to mitigate risk and reduce volatility, but sees confusion on the part of advisors as to how to get returns versus a long-only strategy. “They will use more alternatives, mainly in hedging strategies, but they will still need to deliver more return, and they’re still concerned about where those sources will come from,” he said.

“Sophisticated advisors,” Lake said, “realize they will have to pay more money for expertise, and they will do it,” while Worthington argued that “many advisors don’t realize the ‘illiquidity premium’ will always be with us. If you think you can build a portfolio with just alternative investments that are liquid, you won’t get the returns.”

Cadigan had the last word: “It really comes down to taking alternative investments and traditional investments and putting them in a strategy that works in either market direction.” That’s your job. Good luck.


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