Debate Over Risk Mitigation Properties Of Alternatives Sheds Light On Need For Client Education

Tuesday, December 11, 2012 08:30
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Debate Over Risk Mitigation Properties Of Alternatives Sheds Light On Need For Client Education

Tags: client education | alternative investments | risk

Managers for Aston Funds, Direxion, and Salient sat down in New York City together last week to separate fact from fiction when it comes to the inherent risks in alternatives investing.

 

Advisors are increasingly investing in alternatives. Two recent studies by Cogent Research and Natixis Global Asset Management show why.

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Alternatives refer to anything outside of the traditional portfolio components of stocks, bonds, and cash.
 
That includes long-short equity funds, REITs, currencies, hard assets, and managed futures.
 
Seventy-two percent of advisors no longer believe the traditional 60/40 portfolio mix of stocks and bonds is effective. And 78% of advisors use mutual funds as the instrument of choice to access alternatives.
 
Over 75% of institutional investors consider alternatives as essential components of a diversified portfolio.
 
The three large concerns of advisors from a portfolio management perspective are transparency, liquidity, and cost.
 
The biggest challenge surrounding those concerns is how to effectively integrate alternatives into client portfolios.
 
Learning how different types of alternatives function is the key to success. If you don’t understand the nature of the inherent risks, you can end up with zero yield when other investments are delivering positive returns.
 
After the crash, investors found that the volatility of a traditional portfolio jumped from about 10% to 40% or 50%. And that commodities can correlate with stocks. But they are not as inflationary as stocks.
 
Educating clients to these risks before they invest is critical to risk management success as well as to strengthening client relationships.
 

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