To prepare for upside risk, which he agreed is a possibility, McMillan said portfolios need to employ some type of long-only beta strategy, along with perhaps a long-short equity strategy.
To take advantage of market volatility, a call-write strategy can be useful. And private equity and hedge funds are ways to harvest illiquidity premiums.
But regardless of the alternative investments used, investors -- and certainly, their advisors -- need to evaluate the return drivers to see if they're doing what they're supposed to do, McMillan said.
In that vein, he referred to managed futures, which performed magnificently during the 2008 market crash but have performed so-so at best since then. And some would even say they've underperformed. "Someone yesterday [at the conference] argued that underperformance is necessary," McMillan said. "If you have non-correlated assets [which managed futures and other alternatives are supposed to be], at any given point that part of your portfolio will underperform. That being the case, they [non-correlated assets] are doing what they're supposed to do, both good and bad."
Moral of the story: As advisors and their clients increasingly turn to alternative investments to reduce volatility and provide some alpha in choppy markets, they need to fully understand how they're structured and what they're designed for.
--Jeff Schlegel