“Retirees will have to look at non-traditional or alternative investments and alternative portfolio construction methods like risk parity if they want to achieve the level of returns that will afford them a comfortable standard of living,” said Radcliffe, co-manager of the Salient Alternatives Strategy Fund.

Risk parity is a portfolio construction technique that targets a specific risk level or volatility level and equalizes it with equal contributions of that volatility from each asset class. For example, in a portfolio made up of equities, commodities and bonds, each asset class would contribute one-third to the level of volatility.

Greater Access, More Due Diligence
Democratization of the broadly defined alternatives space is fine, but many of these vehicles haven’t been around long enough to show their stripes through different economic cycles.

“The downside of the advent of alternative investments—such as hedge funds, commodities, managed futures and currency—is the lack of a track record for a significant number of the alternative mutual funds,” said Edward Egilinksky, head of alternatives at Direxion, a fund company in New York.

He noted that Direxion uses rules-based indices to provide its alternative strategies with longer-term index data as a reference point.

“In a number of alternative mutual fund categories, there are only a few years of fund performance available, which means research by investors and financial advisors is paramount going forward to make sure a strategy adheres to a specific discipline,” Egilinsky said.

According to Cogent, 44% of advisors said that alternative investments as an asset class lacks a track record. Cogent also found that 36% of advisors said they did not have sufficient knowledge about alternative investments.

On The Horizon
Nonetheless, alternative investments are gaining momentum among investors and their advisors. Lake, who is portfolio manager of the Aston/Lake Partners Lasso Alternatives Fund, said that favored strategies for 2013 among alternative mutual funds include long-short equity, long-short fixed income, credit opportunity funds and global macro.

“Credit is a good way to play the corporate market but getting access is challenging,” said Radcliffe, adding that financial advisors normally would have to invest in hedge funds to get into private lending strategies.

Panelists pointed to other areas of growth in the alternative space next year, such as managed futures, volatility strategies and commodities.