It’s one thing to add alternative investments to client portfolios, but it’s another thing to understand the different types of alternative strategies and products, how they’re designed to work in a portfolio, and how they can best address a client’s fears and expectations.

The topic was conversation fodder at a panel discussion today at the Fifth Annual Innovative Alternative Investment Strategies conference in Denver, which is hosted by Financial Advisor and Private Wealth magazines and has more than 700 attendees.

“The simplest way to explain alternatives to clients is to say we’re trying to find alternative sources of returns,” said Cleo Chang, chief investment officer at Wilshire Funds Management, the global investment management business unit of Santa Monica, Calif.-based Wilshire Associates.

“When we communicate alternative investing across the board regardless of whether it’s high-net-worth, mass affluent or institutional investors, we like to approach it by asking what do you currently not like about how your portfolios are constructed, and what risk do you think the current portfolio isn’t properly addressing.”

For folks with a traditional 60-40 stocks-and-bonds portfolio, Chang will ask investors whether they’re more concerned about rising interest rates or about equity beta, or both.

“I think those are different issues and concerns that should be addressed differently,” she said.

“We believe there are ways to utilize alternative mutual funds to try to reduce interest rate exposure without adding on much more risk to the portfolio, and that can be achieved by some combination of relative value, global macro and event driven types of strategies,” Chang explained.

But if investors still have 2008 on their minds and are worried about equity drawdowns, she added, one way to provide an equity-like portfolio with less drawdown risk is with an equity long/short strategy that she said has 20% to 30% less beta than a long-only equity fund.

Into The Pool

Dan Roe, chief investment officer at Budros, Ruhlin & Roe Inc., a RIA in Columbus, Ohio, said his firm starts the alternatives conversation with clients with a broad definition of alternative investments by explaining to clients they’re not stocks, bonds or cash.

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