If we hadn't fully grasped it beforehand, one of the great lessons from the financial crisis of '08 and early '09 is that the markets are risky. Like, really risky. Allocation strategies among traditional asset classes didn't provide much-if any-downside protection when nearly all asset classes went down the drain together.
So it's no surprise that alternative investments have generated lots of interest in the post-meltdown world. But the alternative universe is broad, and at times confusing.
In late July, Financial Advisor and Private Wealth magazines brought together some of the sharpest minds in the alternative investment space for the inaugural Innovative Alternative Strategies conference at the Westin Chicago River North hotel.
As the tour boats floated by along the adjacent Chicago River in the heart of downtown, more than 400 attendees discussed the ins and outs of numerous alternative strategies, why there's a need for them and how to implement them in investment portfolios.
"Now more than ever, you have to think about how portfolios are positioned for risk versus how they're positioned for returns," Marc Zeitoun, managing director and head of distributions at Rydex/SGI, said during the conference's welcoming session. He cited the massive inflows into bond funds during the past 18 months as evidence of people's risk aversion, but also said it's a strategy he deems potentially misguided because bonds could get whacked by rising interest rates.
Alternative investments could help dampen that risk "because they're not necessarily sensitive to interest rate movements and they have low correlation to equities," Zeitoun said.
And, he added, many alternative strategies have the ability to go both long and short, a helpful tack considering that the major equity indexes were saddled with flat returns and rising volatility during the past decade.
"The only way to make money in a market not moving in a secular trend is by being opportunistic on the long and short sides," Zeitoun said.
Broad Array
Session topics during the two-day conference ranged from understanding how structured notes and residential mortgage debt can fit into portfolios, to investing in currencies and researching hedge funds. One of the most heavily attended sessions was about managed futures, which are investment vehicles managed by commodity trading advisors (CTAs) who invest in a range of global futures markets. CTAs are individuals who get paid for advising others about buying or selling futures contracts or commodity options. They're regulated by the Commodity Futures Trading Commission and the National Futures Association, the self-regulatory organization of the futures industry.
Managed futures participate in about 150 markets running the gamut from stock indexes and foreign currencies to palladium and pork bellies. As one of the panelists at the session quipped, the industry isn't just about trading orange futures like in the movie Trading Places.