Alternative Investments Reconsidered in Current Market

As often happens when uncertainty envelopes financial markets, the topic of alternative investments lands on the tips of many tongues.  

Granted, hedging risk or adding some octane to traditional alpha via alternative investments isn’t for everyone. Still, experts say alternatives are worth reviewing in the current market cycle. 

“It does feel like it could be a good time to consider increasing allocations to alternatives,” said Noah Hamman, chief executive of AdvisorShares.

Describing alternative investments as “a form of portfolio insurance,” Hamman contended that the key is to have them in place before they are needed. 

“When it comes to alternatives, a little can help, a lot can help, but it only helps in the right time frames,” he said. 

Alternatives Are a Vast Category 

Because alternative investments can encompass a vast category that includes anything beyond traditional stocks and bonds, evaluating them can create unique challenges and opportunities for financial advisors and market professionals.  

For example, the four best-performing alternative strategy ETFs tracked by etf.com this year through October have gained between 36.2% and 76.7%. 

That sounds like a slam dunk investment category until you consider the four worst performers over the same period are down between 58.8% and 88.7%. 

Consider those extreme examples of souped-up alpha and market hedging. 

Lack of Correlation 

As Hamman put it, non-correlation is what you want if you plan to dabble in alternative investments. 

“A lot of people look at alts that do move like the markets, but those probably aren’t going to do well when the market isn’t doing well,” he said. “A true alternative strategy it needs to be non-correlated, and that’s sometimes a hard thing for people to invest in.” 

Christian Salomone, chief investment officer at Ballast Rock Private Wealth, is among those advisors who views alternatives as a permanent piece of a diversified portfolio. But he can also appreciate why more investors might be consider alts now. 

“Given the increase in geopolitical conflicts, there’s a lot of potential for volatility in the market,” he said. “If you’re only invested in long-only strategies or market- replicating ETFs, you don’t have any hedge for that volatility.” 

Reducing Volatility

 In terms of how and where to introduce alternatives into a portfolio, Salomone advised thinking of, “any type of investment you can introduce into a portfolio to help provide more diversification and potentially offset some of that volatility.” 

That is the exact thinking of Chuck Failla, president of Sovereign Financial Group. 

“We like the alternative space and are looking to selectively increase our exposure to certain segments of the alternatives universe,” he said. “Specifically, we are most interested in income-oriented alternatives [such as] private credit and REITs (real estate investment trusts).” 

A Counterargument

Meanwhile, Paul Schatz, founder and president of Heritage Capital, said he doesn’t believe now is the time to loading up on market hedges. 

“I don’t think there is anything special or any catalyst to suggest that right now is an opportune time to add alternative strategies,” he said. 

On the general topic of alternatives, Schatz agrees the category can be overly broad and therefore more complex than necessary. 

“The other issue is that the term ‘alternative strategies’ encompasses way too many investment strategies,” he said. “Many people equate it with a large position in commodities, and I don’t know that I would run with an over allocation to commodities right now, especially when the likelihood of a recession next year increases.” 

On the other hand, Schatz said he sees “tremendous opportunity in distress credit.” 

Anticipating the Current Market

Jake Miller, co-founder of Opto Investments, said he launched his alternative-investments platform three and a half years ago with this kind of market cycle in mind. 

“Our goal is to increase access to private markets for RIAs and family offices,” he said, using the acronym for registered investment advisor. 

Opto emphasizes the most exclusive and illiquid areas of alternative investing, where Miller anticipates a “rich vein of alpha.” 

“Equity valuations are stretched, real yields are under pressure, and a lot of investors are doing the math and saying it doesn’t add up to what they need,” he said. “You can take more risk in beta, which might not be ideal, or find ways to add alpha to the portfolio.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter