Envestnet Touts Liquid Alternatives

Robert Kea, portfolio manager in the global asset allocation group at Putnam Investments, seized on the idea of absolute returns. Two very old assumptions, he said, were that markets go up and relative return products aren’t correlated. However, in the current climate, lower returns and higher volatility are and likely will continue to be common, so it is more important than ever to diversify client holdings.

Comparing traditional investing strategies to absolute returns, Kea said that the former defines success as beating the market and risk as lagging the market, while absolute return strategies define success as positive returns and risk as losing money. The difference between the two, in addition to the latter’s ability to “go anywhere” to seek returns rather than being limited as many fund managers are to specific types or amounts of investments and a risk-free benchmark, mean that those who follow the latter strategy will make out better than those who follow the traditional route.

And alternative investment products offer ways to do that, sometimes because they offer the means to engage in nontraditional strategies, such as shorting an investment instead of holding it. Traditional investments can beat the market and still lose money, while alternatives offer the opportunity to make money without benchmarking to the market. Guarding against volatility is more conducive to building wealth, Kea explained, than looking for high market returns, since a lower but steady rate of return will grow faster than a high and highly volatile rate of return that fails to build on early gains but loses them instead.

Christine Johnson, director of alternative and multi-asset strategies at DWS Investments, spoke about alternatives as the “new core”—comparing them to foreign investments 15 years ago, when they were a rarity in portfolios but now are commonplace. Such will be the fate of alternatives as well, she said.

She defined alternatives in the basic categories of equities, event driven, macro, relative value and illiquid—many of which are becoming more liquid and accessible.

Institutions are boosting their alternative investments, and she added that all investors should have an alternative component to their portfolios.