Page 45 - Investment Advisor July/August 2022

ALTERNATIVE INVESTMENTS

By Josh Vail

3 Ways Alternatives Help Manage Investor Emotions

Kind of like a mom, alternatives help clients stay the course and offer
protection in bad times.

n the last few years, many alterna-
tives have lagged broad stock mar-
Ikets, but recent market movement
suggests a favorable shift.
For the year ending mid-May 2022,
the rolling, three-month, annualized
daily volatility of the S&P 500 has nearly
doubled — from over 13% to over 25%.
Returns for the S&P 500 were down over
18% and the AGG was down over 9.5%.
Meanwhile, many private investments
fared much better and the Wilshire’s
Liquid Alternative Global Macro Index, a
popular index in the liquid alternative
space, was up 5.35% for the quarter. real estate for example, which is largely Alternatives are the rock of the
Warren Buffet said, “Be fearful when considered one of greatest wealth-creation portfolio. When mothers tell their
others are greedy and greedy when others investments out there. One could argue children that everything is going to be
are fearful.” It’s hard to avoid letting emo- that stocks historically outperform the ok, it makes everything a little better.
tions get the best of us when it comes to underlying asset and yes, leverage plays an Alternatives offer the same reassurance.
investing, which is why the market often important role with regard to end results. Two low-correlating assets with high
follows investor whims. Morningstar’s But the nature of real estate is such that volatility can result in a lower combined
2021 “Mind the Gap” study found that investors are forced to make decisions volatility than either of the two assets
on average over the 10 years ending Dec. counter to their rote behavioral instincts on a standalone basis. Investors can
31, 2020, investors realized 1.7% less than and hold through difficult periods. If look to the alternatives in their portfolio
the funds their investments generated there are barriers to sale, investors are to see that things are not all bad, even in
over the same span. Had those inves- less likely to look for the exits. the worst of times. We can see this
tors bought and held, they would have Alternatives provide a rosy view. now: In Q1 2022, many managed future
improved their return by one-sixth. Most illiquid alternative investments funds were the bright spot in portfolios.
Alternatives offer important advan- present lower volatility, so they feel safer. The SG Trend Index, a popular index
tages in a portfolio. They have the According to Hamilton Lane research, many manage futures managers use as
potential to generate alpha; returns that when looking at “ de-smoothed” a benchmark, was up 17.68%, compared
are independent of the market; and they volatility, private equity has a similar to the return of a 60/40 portfolio being
exhibit lower volatility. Perhaps their risk level to the public markets. down about 5.6%.
greatest advantage is their ability to help Though private equity typically outper- Using alternatives in a portfolio is an
investors manage emotions. forms at these risk levels, the behavioral important diversification strategy, but
An allocation to alternatives can help advantage lies in the investors’ experience this has a number of behavioral advan-
investors stay the course — like the “moth- with private investments because of how tages too. Like moms, alternatives can
er” of the investment portfolio. Here’s infrequently they are priced. Investors do offer protection and comfort during bad
why alternatives are a lot like our moms: not experience the underlying volatility, times — which is when we all need our
Alternatives protect us from our- and thus, their perception is that private moms the most.
Adobe Stock create a barrier to sale, forcing investors to kets. Simply holding private investments Josh Vail, CAIA, is managing director of
equity is less risky than the public mar-
selves. Illiquid alternative investments
can reassure investors.
hold when they might otherwise sell. Take
Hamilton Lane.

JULY/AUGUST 2022 INVESTMENT ADVISOR 43