From motion picture marketing and litigation funding to managed futures and private equity, the second annual Innovative Alternative Strategies conference sponsored by Financial Advisor and Private Wealth magazines covered the gamut from really alternative investment vehicles to more accessible alternative strategies.
More than 600 people attended the two-day conference, held in the grand ballrooms of the historic Palmer House Hotel in Chicago's Loop in late June. Over the course of 20 breakout sessions, panelists examined the ins and outs of various alternative investments and how to use them in client portfolios.
To kick off things, Rydex|SGI managing director Marc Zeitoun noted that Rydex surveys found 70% of advisors claim that alternative investments are a staple of their asset allocation process. He then laid out the basic reason why alternatives are appealing to growing numbers of financial advisors. "Alternatives' risk-mitigating strategies tend to lower the downside volatility in a client's portfolio. If they lower that downside volatility, the argument is the client wouldn't have a bad client experience and won't feel the need to change advisors."
In the past, Zeitoun noted, many people thought diversification was defined by the number of funds in a portfolio. "But post-2008, diversification has really evolved to the science of correlating asset classes, so now diversification is defined not by the number of different funds in a portfolio, but how do they interact," he said. "That's why we call it a judicious assembly of low-correlating assets because that's the science of portfolio management--reducing the risk for any market environment."
One of the fastest-growing alternative investment classes in recent years has been managed futures. As of December 2010, $266.8 billion was invested in the space, a more than tenfold jump since 1994. But many investors-and their advisors-are on a learning curve when it comes to deploying them in portfolios.
Managed futures are programs run by commodity trading advisors (CTAs) who are registered with the Commodity Futures Trading Commission. They manage client assets in proprietary programs that trade an array of futures contracts in hard and soft commodities, equity indexes, currencies and other assets.
Managed futures shined during the 2008 meltdown, as the industry's various indexes gained around 18% to 20% while the S&P 500 slumped 37%. The beauty of this asset class, proponents say, is that it invests in areas that have low correlation to traditional assets, such as stocks and bonds, to provide diversification to help mitigate investment risk.
"The amount of diversification within the managed futures space is huge," said Brian Bell, research director at alternative asset manager Equinox Fund Management LLC. "We recently looked at the correlation of all of the managers in our products and found that 80% of them have daily correlations to each other of less than 0.4%."
Bell said that since 1980 there have been 33 months when the S&P was down 5% or more, and during 79% of those months managed futures had positive performance.
Of course, managed futures aren't a panacea, and their lack of correlation to stocks and bonds can work both ways. "One of the struggles of managed futures is keeping people in the strategy when we're not performing at the peak when other assets might be," said Brad Weltler, regional director at Steben & Co. "2008 was obviously a great sales year for all of us in the space, but we lost money in 2009 when other assets went up. But that's the reason why you have strategies that react differently over different times. Advisors try to get clients from Point A to Point B with the least amount of risk, and you do that by allocating to different strategies. Managed futures can be a piece of that overall puzzle."
Regarding the allocation of managed futures, Weltler suggested they should comprise 15% of the equity portion of a portfolio. So in a 60-40 allocation, 15% of the 60% portion allocated to stocks-or 9% of the total portfolio-would provide the optimal risk reduction of the portfolio's equity component, he said.