Page 19 - Investment Advisor - December 2021

ALTERNATIVE INVESTMENTS

By Josh Vail

2 Ways to Remove the Alternatives’

Mystique for Clients

Dialogue broaching these products shouldn’t be intimidating. Here’s how.

he new year provides a natu- the portfolio. Framing the purpose also
ral opportunity for advisors to helps make sense of the strategies.
Treview portfolios with clients and The first category — return enhanc-
discuss whether to add anything new to ers — is easiest to conceptualize. If
the allocation. For financial professionals, an advisor and client believe they can
these conversations come naturally. get excess return from private equity,
But for the end clients who seldomly opportunistic long/short, or concentrat-
look at their portfolio and aren’t steeped ed thematic investments, they may want
in the markets, talk of change can be to consider the opportunity.
intimidating. This is particularly true The diversifier category includes alter-
when it comes to alternative invest- natives with little correlation to equities.
ments. And honestly, the industry hasn’t A few strategies that fall into this category
exactly made itself inviting. include managed futures, market neu-
A negative headline about a sensa- taking place in a private market. Private tral and multicurrency funds. Their role
tional hedge fund manager is sometimes debt, meanwhile, simply means lending should not be understated. Most asset
the only thing the average investor might to a private business. And gold, like cash, classes are highly correlated to stocks,
hear about the asset class. And whoever is seen as a store of value. Derivatives, which has big implications during a down-
authored the names of most strategies — meanwhile, are instruments that’s value is turn. For perspective: an equally weighted
long/short, event-driven, merger arbi- tied to one of these three assets. portfolio of two assets with like volatilities
trage — clearly wasn’t a marketer. The second camp of alternative strat- and a correlation of 0.7 would still exhibit
But dialogue with clients about alter- egies — those that manage assets in a 92% of the volatility of either asset in iso-
natives doesn’t have to be confusing. unique way to create a unique return lation. Strategies in this category seek to
In our own client conversations, we’ve stream — are often more intimidating. bring that portfolio volatility down.
found two ways to remove the mystique: This is a function of nomenclature. Take The third category — risk reducers —
the event-driven fund as an example. reduce portfolio risk, but don’t overly
GET TO THE CORE: WHAT DO The name may sound perplexing, but sacrifice returns. The objective is dif-
ALTERNATIVES REALLY INVEST IN? the strategy typically is just buying and ferent from diversifiers. In short, these
Alternative strategies fall into two selling stocks. It is just uniquely focus- strategies hold up during equity mar-
camps — those that invest in assets that ing on the opportunities that arise from ket downturns, but typically outperform
are harder for individuals to gain access a corporate event such as a bankruptcy, more traditional downside risk miti-
to (think real estate, private equity and merger or restructuring. gators over longer horizons. Examples
private debt) and those that manage Breaking assets and strategies down include long/short equity, long/short
assets in a unique way to create a unique to the essence of what they are is one credit and non-traditional bond funds.
return stream. way to make alternatives approachable. By explaining a strategy’s role and
For the former camp, these assets — Another is to categorize the alternatives the basics of its underlying investments,
while harder to access — are not so differ- by their basic function. advisors remove the shroud of com-
ent from traditional assets. The investor plexity surrounding alternatives. Clients
still is doing one of just three things: own- EXPLAINING PURPOSE MAKES may, or may not, decide the strategy is
ing, lending or exchanging a currency. ALTERNATIVES LESS PERPLEXING right for them. But they won’t balk at the
With real estate, for example, the inves- While there are many alternative initial conversation.
Adobe Stock asset. With private equity, they are buying cally play one of three roles: Enhancing Josh Vail, CAIA, is managing director of
strategies to choose from, they typi-
tor is taking an ownership stake in the real
return, reducing risk or diversifying
an equity stake in a company … it is just
Hamilton Lane.

DECEMBER 2021 INVESTMENT ADVISOR 17