The Value of Alternative Investments
Investors can diversify in many ways, including by seeking portfolios of assets
that combine different investment types, sectors and geographic concentrations.
For many high net worth investors, this has traditionally resulted in portfolios
containing a mix of stocks, bonds and possibly real estate holdings.
However, during times of market stress, the performance of these assets can correlate.¹
When this happens, the benefits of diversification are lost.

How Will Your Portfolio Respond During Times of Market Stress?
Modern Portfolio Theory tells us that holding a well-diversified 'basket' of investments
can be one of the best ways for individual investors to reduce risk for a given
level of performance.² But a portfolio comprised of only stocks, bonds and
real estate may not be enough to provide true diversification.
A Non-Correlated Portfolio: The Key to True Diversification
The key to Modern Portfolio Theory was the revelation that the risk of any investment
can be reduced and/or performance increased by forming a portfolio of diverse and
non-correlated assets. Simply put, a truly diversified portfolio contains
not only a range of different asset types, but also assets that have low correlations
to one another. Constructing your portfolio this way will reduce the likelihood
that your assets will move in tandem, which can be especially important when the
broader markets may be down and diversification may be most needed.
Alternative Investments and Diversification
How do you find assets that are not correlated with a traditional portfolio of stocks
and bonds? Alternative investments, including hedge funds and managed futures, are
one option that many sophisticated high net worth investors are investigating. Hedge
funds and other alternative investments utilize sophisticated trading techniques
not widely employed by many traditional investment classes. Some alternative investments
have exhibited strong historical performance
against the broader markets. But most importantly, some have historically proven
to have low correlation with broader
market activity, including stocks and bonds. It is this historically low correlation
that potentially makes alternative investments an attractive consideration for addition
to traditional portfolios. Past performance is not necessarily indicative of future
results. Correlations will change over time. Not all alternative investments provide
low correlation to traditional markets.
View Historical Alternative
Investments Performance
Learn About the Benefits of Portfolio
Diversification
Download the Article Can Alternative Investments Help Diversify Traditional
Portfolios?
Integrating Alternative Investments Into Your Portfolio
The diversification benefits of some alternative
investments mean that, for the right investor, dedicating a portion of your overall
portfolio to alternative investments can result in a portfolio with the potential
for improved performance in both bull and bear markets. Past performance is not
necessarily indicative of future results. There is no guarantee that the addition
of alternative investments to a portfolio will increase returns or avoid losses.
Altegris can help you understand whether alternative investments may be suitable
for you, given your current portfolio, investment goals and risk tolerance. And
if hedge funds or other alternative investments make sense for you, we can give
you access to information on specific investments and strategies, including some
of the investments on our Altegris Premier Managers platform.
Learn How Altegris Can Work With
You
1. In the case of hedge funds, the SEC recently stated that hedge funds have been
used to diversify investments based on their historical low correlation with more
traditional equity and fixed-income investments. And in the case of managed futures,
these products exhibit similar historical correlation properties. (Implications
of the Growth of Hedge Funds," the Securities and Exchange Commission, 2003.) In
fact, many managed futures programs have historically been negatively correlated
with equity indices in months when equity returns have been negative, and positively
correlated when equity returns are positive. (Burak Cerrahoglu and Dulari Panholi,
"The Benefits of Managed Futures," Center for International Securities and Derivatives
Markets, March 2003.) Dr. John Lintner of Harvard University concluded that "The
combined portfolios of stocks after including judicious investments in managed futures
accounts show substantially less risk, at every possible level of expected return,
than portfolios of stocks (or stocks and bonds) alone." (Dr John Lintner, "The Potential
Role of Managed Futures Accounts in Portfolios of Stocks and Bonds," 1983.) Correlations
will change over time. Not all alternative investments provide low correlation to
traditional markets.
2. Harry Markowitz, "Portfolio Selection," Journal of Finance, March 1952.