Hence, one of the constant themes during this panel discussion was the need for advisors to get up to speed on the various alternative strategies so that they can better educate their clients on how these types of investments can improve their portfolios.

For example, Chang said, there are 86 non-traditional bond funds tracked by Morningstar. Within that category, the Wilshire research team classifies 51 of those 86 funds as alternative-strategy, relative-value investment styles. They classify an additional 12 of those 86 funds as alternative strategies in the event-driven vein that aim to take advantage of corporate events.

“Imagine this spectrum of strategies that you can be doing just within that one Morningstar category,” Chang said, “and that’s not even going into the true alternatives like market neutral and bear fund categories.

“In today’s environment it’s really important for advisors to dedicate the resources to truly understand the space and properly advise their clients, or to find some kind of outsourced assistance to decode what exactly is out there that are lumped into categories we’re so comfortable using,” she added. “Easy classifications can sometimes be misleading.”

How To Allocate

Meyer said his firm started looking into liquid alternatives in 2006 and 2007 to try to lower the beta of client portfolios. Their high-net-worth investors were in traditional hedge funds, but Meyer said they were more concerned about lowering portfolio risk for the firm’s mass-affluent clients. The relatively few liquid offerings at that time were mainly in the long/short equity category, along with some managed futures funds and other strategies.

“What we’ve learned along the way is it doesn’t make sense to put just 5% of portfolio assets into alternatives,” Meyer said. “If you want to try to lower the beta in an effective way, then you should have at least 20% to 25% in alternatives.”

He added that his firm ramped up to that amount by 2008-2009, and it helped buffer client portfolios during the market crash. That said, alternatives weren’t—and aren’t—a silver bullet.

“Our clients suffered in 2008; they just suffered less, which is important and that’s what alternative investments are there for—to act as a shock absorber,” Meyer said. “They really helped our clients versus being exposed as long-only investors.”

So where should advisors pull money from to allocate to alternative investments?