Are Advisors Using Alts as Intended?

Alternative investments have been heralded as a way for advisors to reduce risk or volatility, diversify holdings or enhance returns in client portfolios, but advisors are not necessarily using them as intended.

According to a recent survey from BlackRock, 76% of close to 470 advisors who had used alts in the past 12 months ended June 30, said they employed alts to reduce risk, but almost half the alt models they used had a high correlation to stock market returns, which essentially amplified their stock market exposure even as some may have reduced overall portfolio risk.

(Related: Wirehouses Warn: 60/40 Asset Allocation Is Dead)

“Most advisors indicate they want their alternative holdings to diversify… We more often find them allocating to ‘modifiers’ — alternatives that reduce portfolio risk through lower beta but relatively higher correlation to the core holdings in the portfolio,” the report notes. “If it’s truly diversifiers they seek, then low correlation to stocks is a must… Alternatives that are correlated to stocks won’t necessarily protect if markets fall.”

But if those advisors want to use a high correlation modifier, “holding a broad market ETF with the appropriate amount of cash to reduce beta)” could be had “for much less,” according to the BlackRock report.