Extraordinary times could call for extraordinary investments.

The unpredictable presidency of Donald Trump has helped return volatility to financial markets, and alternative assets may benefit. That’s the view of some asset managers, advisors and analysts who will be speaking at Financial Advisor’s 9th Annual Inside Alternatives and Asset Allocation Conference, which is scheduled to run from September 24-25 at the Wynn Las Vegas.

“I’ve never seen a president more bullish and bearish for the markets at the same time,” says Ed Yardeni, president of New York-based Yardeni Research. “There are deregulation and tax cuts, which are bullish for earnings and the market, and the economy in general. Yet, at the same time, a few weeks after the tax package was enacted, Trump’s administration started focusing on protectionism, which is something that poses a lot of challenges for individual companies.”

Until recently, investors had little reason for concern. Traditional asset classes benefited from a 30-year decline in interest rates, creating an extended bull market in bonds. Then, several years of near-zero rates and accommodative monetary policy catalyzed an extended bull market in equities.

Yardeni remains optimistic on the economy and unconcerned about recession risks. However, he also expects uncertainty and volatility to continue over the short term, which could help drive more assets into alternatives.

Liquid alternative funds enjoyed rapid growth in the years following the global financial crisis, but slowed as assets flowed toward inexpensive passive products through a low volatility bull market. According to Wilshire Associates, the liquid alternatives universe gained $9 billion in assets during the first quarter of 2018, growing to encompass 494 funds with $333 billion in assets.

Advisors who had few reasons to incorporate alternatives in recent years may be changing their tune—but not necessarily on liquid alternatives. More investors have become comfortable investing in real assets, private equity and alternative debt instruments, says Paul Pagnato, founder and CEO of PagnatoKarp, a $3.5 billion RIA based in Reston, Va.

“I think it’s timely to talk about alternatives,” Pagnato says. “There’s not a lot of people who you could talk to right now who would say that stocks are inexpensive or that they’re not overvalued. That’s not to say that they can’t go higher; bull markets always last longer than they should. But we do know from historical measurements that valuations are high.”

Pagnato says that his clients on average have between 25% and 35% of their portfolios in alternatives, most often using them to boost cash-flow generation. For example, Pagnato uses reinsurance to try to generate an 8% annual total return, with annual cash flow of 6%.

Pagnato’s clients also invest in farmland, drawing income from leasing, he says, which can generate 8% to 10% total returns with 4% to 5% annual cash flow. Agricultural financing, short-term funding to help industrial farmers plant a crop, can also generate an 8% to 10% total return.

“We also like microlending, investments available in the public marketplace through something like a LendingTree or a SoFi,” says Pagnato. “We feel this is a good alternative because it’s not municipal bonds or corporate debt. It’s not in the equity market. It tends to be consumer cyclical but it has a lot of non-correlation. We shoot for a total return of 8% to 9% annually, with a cash flow of around 6% to 7%.”

As monetary tightening occurs, higher interest rates reduce the value of bonds and dividend-paying stocks, which may lead investors to seek protection, in lieu of more income, from alternative investments. According to a June survey by New York-based alternatives platform iCapital Network, most advisors to the affluent are planning to increase their clients’ allocations to private equity, hedge funds and private direct deals over the next 12 months, motivated mostly by the desire to achieve better investment returns and defensively diversify portfolios.

These advisors could also be playing defense against the Trump administration. While the president’s policies move markets, it’s often his rhetoric and his candid social media presence that captivate investor attention.

Trump’s tweets concern merger arbitration fund managers as well, says Gregg Loprete, of New York-based Water Island Capital, portfolio manager of the Arbitrage Credit Opportunities Fund. “With antitrust issues, the courts should probably be the ultimate determinant, but we’ve seen him jump into the issues,” says Loprete. “Trump was out there tweeting about the AT&T-Time Warner deal and it threw a lot of politics into economic policy. It’s been challenging for investors to decide what to do.”

The $46.3 million Arbitrage Credit Opportunities Fund (ACFIX), launched in 2012, is an unconstrained bond fund; it is not tied to any benchmark and its managers have few limits for what investments they access. They employ Water Island Capital’s event-driven investment philosophy to find investment catalysts like mergers, refinancing and regulatory changes. ACFIX carries a 1.43% net expense ratio. As of June 29, the fund had five-year annualized returns of 2.54%, according to Morningstar.

“There will be different climates for event-driven investing. What we like is that we feel like we can generate returns not impacted by changes in interest rates or equity volatility,” says Loprete. “We’re not targeting absolute return, we’re looking at total return and income, but when I look at the returns we’ve put up since inception, it’s looked a lot like an absolute return fund.”

Trump’s social media posts move markets. On June 1, he seemed to reveal a positive jobs report early by tweeting that he was “looking forward to seeing the employment numbers at 8:30 this morning,” a seemingly innocuous statement that prompted Treasury yields to rise, as well as the value of the dollar.

Unpredictability causes and exacerbates volatility—volatility in the U.S. equity market spiked in early February as positive jobs numbers and inflationary signals boosted Treasury yields. Volatility has remained elevated in part because of the president’s protectionist language.

The uptick in volatility is a tailwind for certain alternative strategies and funds. For example, Eric Cott, director of financial advisor education for the Options Industry Council, has seen increased interest in using options to provide downside protection for an equity allocation via put-buying strategies.

In recent years, some managers responded to low yields by selling covered calls to produce a stream of investment income for their clients, says Cott. After the prolonged bull market, advisors are also exploring options to generate returns from positions with a very low cost basis that would post a large capital gain if sold.

“They’re looking at this volatility as an opportunity to have discussions with their clients,” says Cott. “They’re asking whether there’s an opportunity to put a strategy on the table that could buffer a portfolio from downside risk. The collaring strategy seems to be more in discussion now, sort of in a hybrid role.”

Volatility has also led to more opportunities for event-driven investors running arbitrage strategies, says Loprete.

Rising volatility is, in part, a reversion to the norm for markets after an unusually long calm period, but it’s also a sign that the economic cycle, currently in a growth stage, is aging, says Jason Horowitz, investment director at Wellington Management and co-manager of the John Hancock Seaport Long/Short Fund (JSFBX).

Horowitz is part of the team managing the Seaport fund, a $746 million global macro strategy that incorporates a bottom-up fundamental stock-picking methodology. “On the long side, we’re trying to invest in companies with attractive fundamentals and valuations on an absolute and relative basis because, all other things being equal, we believe these companies are better suited to weather periods of volatility,” says Horowitz. “We also leverage Wellington’s broad and deep resources to contemplate macro, regional, sector, subsector and even factor risks and position the portfolios accordingly.”

Horowitz says people are using the Seaport fund in two ways—as a core equity allocation to complement a long-only position, and as a substitute for the entirety of a long-only position. The fund is managed to try to capture 80% of the market’s upside, 60% of its downside, with two-thirds of the volatility. As of June 29, JSFBX had three-year annualized returns of 3.7%.

Horowitz argues that quantitative easing has masked market instability—as the developed world moves toward monetary tightening, markets lose the façade of tranquility. “Political uncertainty is one of the factors that can drive volatility,” says Horowitz. “The most important indicator we’re focused on from a macro perspective is inflation and the interplay between potentially destabilizing forces like record high debt levels, low productivity growth, populist politics and the threat of protectionist trade policies.”

Escalating rhetoric stokes concern about a possible trade war. Thus far, tariffs on commodities like soybeans, materials like steel and products like industrial machinery have done little to slow the global economy, says Yardeni, but if Trump persists in implementing protectionist policies, it could lead to recession.

Brian Murphy, portfolio manager at Vivaldi Capital Management, a Chicago-based asset manager, sees international trade disputes as an opportunity to outperform by focusing on smaller, domestic equities. “Small-cap companies have had massive tailwinds compared to large-cap multinationals, so the net result is that you’ve had a number of companies down materially in 2018 while others have been up a lot,” says Murphy. “We haven’t seen that type of dispersion on a fundamental basis in a few years.”

The widening dispersion filters down into sectors, says Murphy, so a small company without much international exposure may outperform large-cap companies within the same sector. The 2017 tax reform package and Trump’s deregulatory policies are also increasing dispersion within industries and sectors.

Murphy is on the management team for the Vivaldi Multi-Strategy Fund (OMOIX), a $77.4 million fund that allocates to four different alternatives strategies: a long-short equity strategy with no directional market exposure, a closed-end fund arbitrage relative value strategy, an announced deal merger arbitrage strategy, and an uncorrelated legacy non-agency structured credit strategy.

“It’s been an eventful first half,” says Murphy. “We’ve increased our allocation to our relative value and our merger arbitrage book. The merger arbitrage portfolio has benefited from what seemed to be a sticky backup in interest rates. We’ve had these backups in rates a couple of times, but they haven’t really persisted for more than a few weeks or months. This feels different. Our closed-end arbitrage book has had an uptick in volatility.”

While dispersion presents relative value opportunities, bad blood between international trading partners could sandbag merger arbitrage strategies, says Loprete. “Companies have to go to each country and file with antitrust regulators, administrators and bureaucracies,” he adds. “If tariffs are going up, it could make it difficult for approval to come from certain countries to get a deal done.”

On the other hand, an increase in transactions and share buybacks due to tax cuts expands the opportunity set for managers like Loprete.

Tax cuts and other potential fiscal stimulus put inflationary pressure on the economy, says Yardeni, but other factors help keep inflation in check: global trade, technological innovation and aging demographics, for example. Rising protectionism could increase the prices that Americans pay for goods, jump-start inflation and eat into investment returns.

“We grapple with inflation; we think that it’s coming, but we’ve just been through this incredibly long, controlled period,” says Horowitz. “The confluence of the sheer amount of capital in circulation, solid economic growth, low unemployment and healthy oil prices is going to have an impact over time on inflation, but our expectation is not for a huge shock.”

An inflationary surprise would almost certainly lead to a dramatic increase in interest rates, says Yardeni.