Alternatives Myth-Busting: Can Alts Dampen Risk?

More and more advisors are turning to alternative investments in this low-yield environment, yet for many the jury is still out over whether alts add too much risk to client portfolios.

In an attempt to answer the question of whether alternative investments can or can’t dampen risk, a group of three managers for Aston Funds, Direxion and Salient gathered Thursday in New York to do some alternatives myth-busting.

“Transparency, liquidity and cost–those are advisors’ biggest concerns,” said Edward Eglinsky, managing director of alternative investments at Direxion, adding that his firm considers alternatives to be anything that falls outside of the universe of long-only stocks, bonds and cash.

Using that definition, alternatives include long-short equity, REITs, currencies, hard assets and managed futures. To be sure, all of those investments have found their way into the portfolios that advisors manage. More than 75% of institutional investors in the United States consider alternative investments essential to a diversified portfolio, according to two separate recent surveys performed by Cogent Research and by Natixis Global Asset Management.

Look at those studies a bit closer, and it becomes even clearer why advisors are investing more in alternatives. The Natixis study found that 72% believe the common 60% stocks/40% bonds mix in portfolios is no longer an efficient way to achieve returns, and the Cogent study found that 78% use mutual funds to access alternative investments.

“Most people view alpha as the holy grail, but we think alternative beta is more interesting and widely available,” said Jeremy Radcliffe, co-founder and managing director with Salient Partners.

Radcliffe said preferring alpha over beta is a misplaced notion because alpha is a zero-sum game, and what was alpha 10 years ago simply isn’t anymore. Salient favors viewing alternatives in terms of achieving “risk parity” in a portfolio, Radcliffe said.