For the most ETF Trends Twitter Spaces, Todd Rosenbluth, head of research for ETF Trends and ETF Database, hosted a discussion on alternatives with Shanna Sissel, director of investments at Cope Corrales, and Corey Hoffstein, CIO and co-founder of Newfound Research.
According to Sissel, alternatives are generally assets that aren’t long-only stocks or bonds and utilize strategies traditionally utilized by hedge funds, including venture capital, private equity, and commodities. Hoffstein explains them as assets that aren’t traditional equity rate or credit beta, but both agree that alternatives broadly are approached as a portfolio diversifier and risk management tool by advisors.
“At this time, in this market, it’s a particularly important conversation to have because there’s a lot of risk in bonds, and there’s a lot of risk in stocks now, so where do you turn?” Sissel says. “Alternatives actually perfectly fit in that spot as a diversifier in a risk tool in a market where the places you typically would go are equally as risky right now.”
Hoffstein approaches alternatives investing primarily as a strategic approach to hedge for inflation risk in a traditional 60/40 portfolio that is 60% globally diversified equities, and 40% primarily U.S. fixed income for U.S. investors. Managed futures offer an excellent solution for this type of client and portfolio, and in today’s environment that typically looks like short bonds and long commodities.
Investing in alternatives saw a huge uptick in 2007-2008 when the SEC relaxed rules around liquid alts because of the strong performance of alts during the global financial crisis, Sissel explains, but flows have been marginal until recently when they have begun to pick up again.
Sissel takes the approach that alternatives should be a permanent part of a portfolio, making up 20%, as a portfolio diversifier.
“I think advisors should be considering this as a core part of their strategy and sort of the natural evolution to the traditional 60/40,” Sissel says.
Understanding Performance and Strategies
Rosenbluth discusses that the alternatives bucket is very large and contains a great variety of asset types, and tracking performance can sometimes be perplexing, as alternatives may rise less than the broader markets during upswings or fall differently during downward market movement.
It is vital to understand the strategy of an alternatives-based fund and what it carries. These funds are typically uncorrelated to broader markets and can potentially provide less beta during market growth or be more volatile during downturns. A good alternatives fund will provide some protections during market losses, Sissel believes.
Hoffstein sees one of the biggest barriers for alternatives currently as being leverage constraints.
“A lot of the products are internally hedged. You shouldn’t be paying for beta; they’re trying to give you something that is not beta, and to give you an update very often they have to do things that incorporate being both long and short to isolate different return premiums,” Hoffstein says.
Investing in alternatives is something that Hoffstein believes should be done as a stacked asset on top of a portfolio while using other, more capital-efficient investments to provide core beta. Sissel agrees and believes that alternatives work best bundled together instead of as a stand-alone opt-in for a portfolio.
“I think one of the really difficult things about managing alternatives portfolios when it comes to derivatives is going to be the operations,” Hoffstein says and stresses the importance of “really talking to your wholesalers to get an understanding of how the operations flow and the impact into something like an ETF.”
Other subjects that the two talked about are upcoming regulations for derivative products, the higher management fees for alternatives funds, and benchmarking portfolios with alternative products in them.
Alternative funds discussed by Sissel and Hoffstein include AGFIQ U.S. Market Neutral Anti-Beta Fund (BTAL ), the First Trust Global Tactical Commodity Strategy Fund (FTGC ), the iMGP DBi Managed Futures Strategy ETF (DBMF ), the WisdomTree U.S. Efficient Core Fund (NTSX ), and two mutual funds: the Brandywine Alternative Credit Fund and the William Blair Global Macro Allocation Fund.
Listen to the Entire Conversation With Todd Rosenbluth:
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