“That [the alternatives space] could include commodities and real estate for some people,” he said.
But then they mention that those two asset classes will come with equity-like volatility, and that his firm favors splitting them off from the alternative bucket.
“We want to make sure that clients understand we’re seeking an alternative source of returns from stocks and bonds,” Roe said. “That’s why the definition of alternatives becomes important.
“These are allocations and a combined strategy meant to be a buffer, to achieve positive returns, and in this environment achieve positive returns greater than bonds while having volatility more akin to a bond allocation than to the equity markets,” he continued.
Alternative investments can be either illiquid, private equity-type investments or more liquid ’40 Act mutual funds and exchange-traded funds.
“With private equity-type investments, you want to know what you’re getting in that illiquidity pool can’t be achieved in a liquid pool,” Roe said.
Education Is Key
Alternatives have a steeper learning curve than, say, long-only equities. And as more providers roll out liquid alternative funds, that means advisors interested in these products need to do much more due diligence.
“There are so many great strategies out there, but quite frankly our heads our spinning like the girl from ‘The Exorcist’ trying to keep up with all of the new strategies coming out,” said Thomas Meyer, president of Meyer Capital Group, a Marlton, N.J.-based RIA. “There’s so much to learn, and we want to learn before we educate our clients.”
He noted that from a demographic perspective, most advisors’ prime investable asset base rests with clients between the ages of 48 and 68. “And they only know one way to invest, and it’s the long way. I’m talking about the mass affluent who don’t really understand what those strategies are about.”