alternatives

Liquid Alts – a category too broad?

Posted by Anu Heda on Jun 03, 2014, in Thoughts , tagged with

In recent conversations, clients are referring to liquid alts more than  ever. The term is mentioned so casually yet includes many, differing strategies. An article in today’s Wall Street Journal (link; subscription required) reminded me of how different these strategies can be. The article mentions the numerous strategies covered by alternatives and how vastly different performance and uptake has been. The article made me think of fixed income as a fitting corollary. Whether meeting with a Marketer at an asset manager or interviewing an FA, rarely does someone refer to “fixed income.” Much more often we discuss “unconstrained,” “short duration,” or “emerging market corporate.”

As the category matures, I’m betting we’ll hear folks discuss “managed futures” or “broad equity market neutral” alts more often.

Best Blogs of the Week

Posted by Anu Heda on Feb 11, 2013, in Best Blogs of the Week , tagged with , , ,

Hopefully everyone (in the Northeast) is settling in with a fine coffee as you read this Monday morning. We have three high-quality posts from last week to share.

  • MFS – Swanson takes a contrary position regarding US corporate profits.
  • Putnam – Nice job providing correlations and (more importantly) implications.
  • Wells Farg0 – It doesn’t hurt to refresh understandings some times. And this post is a nice Q&A related to alternatives with a leading institutional alternatives manufacturer.

 

Are Firms Delivering an Inconsistent Message on Alternatives?

Posted by Mike McLaughlin on Jan 17, 2013, in Thoughts , tagged with ,

Ignites ran an op-ed (subscription required) from Jon Short at PIMCO about the firm’s promotion of liquid alternative investments. Sometimes in reading a piece like this, I look for the natural contrarian question to ask, and in this case I found it when I reached the following statement:

To be sure, liquid alternative funds are and should remain a portfolio complement rather than a core holding for most investors.

This position has become the stock position of many asset managers. To paraphrase: “Alternatives are great, but you shouldn’t use too much of them (or use them the way an institutional investor does).”

I find this take difficult to reconcile, with the obvious question being: why shouldn’t alternative strategies form the core of an investment portfolio? As it turns out, I’ve already asked a version of this question before. It also turns out that there are pockets of the investment community pushing for alternatives as the foundation of portfolios.

But Mr. Short’s piece makes me further consider the marketing implications of this issue. Consider how Mr. Short continues his thought process by citing that alternative strategies often:

  • Offer a go-anywhere approach to take advantage of the best investment opportunities
  • Have low correlation to traditional equity and fixed income strategies
  • Can be combined to customize a portfolio based on an investor’s goals and risk profile

These seem like the very things many investors are looking for. If alts are the best way to deliver these benefits, I’d expect some firms to be more aggressive in positioning how they should be integrated into some investors’ portfolios.

Of course, there may be data-driven research that confirms a cautious approach in allocating to alts (though I have yet to see firms cite it). And there are two very simple reasons why firms wouldn’t be more aggressive in positioning alts:

  • Self-Interest: the majority of existing assets are tied up in traditional strategies
  • Human Nature: gradual change is an easier story for people to accept than one centered on MAJOR upheaval

Even so, I ultimately think the discussion around alternatives and the types of roles they can play in portfolios needs to evolve from its current state. The current uniformity of the messages from most asset managers, and the disconnect between the substantial benefits of alts compared to the low recommended use of them, means there is a good opportunity for firms to have more differentiated, interesting discussions moving forward.

100% Alternatives in Your Portfolio. Why Not?

Posted by Mike McLaughlin on May 14, 2012, in Thoughts , tagged with , , , , , ,

Third in a series of posts about marketing alternative investment vehicles to financial advisors. Click to read Part I and Part II.

What’s a reasonable allocation to alternative investments within a portfolio? Most everyone agrees “more than 0%” is true. After that? Things get foggy.

For an asset manager marketing alternative vehicles, the allocation issue is important. Not only do many advisors struggle to understand alternatives in the first place, but they also have a lot of uncertainty when it comes to implementation.

I started with a simple review of the allocations firms use in materials that introduce alternatives:

  • BlackRock’s Investing for a New World sets the initial bar at 15%.
  • A Guggeheim (Rydex | SGI) tool implies that the answer is somewhere up to 30%.
  • A similar Altegris tool goes further, showing that a 50% alts allocation may improve results.
  • Raymond James highlights endowments’ 40% allocation to alts, then quickly notes that this is “too high for the majority of individual investors”.

From Raymond James overview of alternative investments.

To complicate things, consider yet another tool offered by Hatteras Funds, and what happens if you select a portfolio that is 100% alternatives (the Model Portfolio below):

In this tool from Hatteras, a 100%-alternative portfolio provides the best results.

Now an appropriate answer for allocating to alternative strategies is not just 15%, 30%, or even 50%. Here, a portfolio of 100% alts is the right choice. Confronted with this, advisors or investors are asking: what should I do?

Clearly there’s a lack of consensus. By itself, this lack of consensus is no big deal. After all, the goal isn’t for all firms to have the same perspective on alternative allocations.

The real problem is that firms only provide allocation guidelines implicitly. In the examples above, no rationale or explanation accompanies the percentages of assets that can (or should be) invested in alts. The data does the talking, and it gives a pretty vague (“more than 0%”) message.

I see two paths for firms in resolving this issue:

  • Punt on allocation, making it clear that alts have a role and the advisor is in the best position to decide what exposure is best for clients.
  • Build a concrete case for a baseline allocation, including the necessary caveats that one-size-does-NOT-fit-all.

Either approach can work, with the key being that the messaging is explicit. Not only will this close a confusing gap in alternatives marketing, but it will help make it clear that providers have a strong grasp on how their products should be deployed.

Marketing Alternatives: The Importance of Education (Part II)

Posted by Mike McLaughlin on Apr 11, 2012, in Thoughts , tagged with , ,

Second in a series of posts about marketing alternative investment vehicles to financial advisors. Check out the first post here.

Last week I made the case for why educating advisors needs to be a focus for any investment manager attempting to market alternative investments.

Today I’ll make the case that I was wrong. And I’ll start, again, with a graphic:

from Rydex | SGI via getalts.com

The above is from Rydex | SGI’s getalts.com, and it communicates a nearly-identical message to the one from Natixis I referenced last week. Namely, that alternatives can enhance portfolio returns while reducing volatility.

This story sheds light on a major reason not to expend a lot of effort on educating advisors about alternatives: everyone is broadcasting a similar message. While often viewed as table stakes in messaging alternatives, the fact is that it’s very tough to stand out when it comes to the basic “Why Alternatives?” conversation.

Besides sameness, two other reasons support focusing efforts away from education:

  • Distribution partners will get more picky. Yes, distributors need help educating their FAs, but they’re also seeing an influx of similar materials. We’ve had a few managers tell us they’ve gotten lukewarm responses to educational offerings. I think that’s in part because there are many already out there. Not every firm can be a go-to resource for informing advisors.
  • Usage of alternatives is concentrated. This is the exact same statement I used to justify including education as a core marketing component – because so many FAs are dabblers. The converse, and also valid, view holds that there’s no point in focusing on the dabblers. Instead, flows to alternatives will come primarily from the 10-20% of FAs who are heavy users, at least for a while. And they are the ones that don’t need the education.

Given that most firms have limited marketing resources and a finite slice of advisors’ attention, it’s perfectly justifiable to focus on the proprietary aspects (e.g., firm, strategy specifics) of the alternative story at the expense of educational content.

Ultimately the importance of education when it comes to marketing alternative vehicles presents a tricky situation for firms. In the next post, I’ll address the mixed messages being provided on how alternatives should be used in clients’ portfolios.