Alternative investments can help shield portfolios from volatility, according to an Envestnet PMC webinar, and also can provide improved liquidity and protection of capital. Those are just some of the potential advantages provided by a growing universe of alternatives, many of which provide improved liquidity.
Tim Clift, chief investment strategist at Envestnet PMC, explained that portfolios that can use leverage, engage in short selling or have access to noncorrelated opportunities offer nontraditional investment strategies not found in traditional long-only portfolios.
In addition, liquid alternative investments—which are growing in number and availability—provide advantages that traditional alternative investments did not offer to many investors, including daily liquidity, transparency, a lack of accreditation requirements, lower minimums, a reduced fee structure and efficient tax reporting.
All these advantages have resulted in what Cerulli characterizes as explosive growth, with assets in alternative mutual funds tripling between 2008 and 2011 and going from $78 billion in AUM to $214 billion.
Envestnet, said Clift, thinks that a 20%–30% allocation to alternatives in a portfolio is the optimum, because they are not risky. In fact, he said, “nothing could be farther from the truth,” since alternatives provide a number of advantages, including hedging strategies and a way to lower interest rate risk.
They can also provide a means of absolute returns, which provide a significant reduction in downside risk in exchange for surrendering a bit of upside potential.