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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.

Diversification

High net worth investors may be able to benefit by adding alternative investments, including hedge funds, managed futures, or other non-traditional investments, to their existing portfolios.

Stocks and Bonds can correlate during times of stress.¹

Adding non-correlated assets to the mix, including alternative investments, increases the likelihood that your portfolio will be able to respond to a variety of different market conditions, including when traditional markets are down.²

Note: Illustrations only. Not real portfolios.

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Alternative investment products, including hedge funds and managed futures, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Altegris, a FINRA and NFA member, offers various alternative investments, including hedge funds, futures funds and managed futures and commodities accounts, that may operate in commodities markets and foreign markets, among others. Altegris and/or its officers/partners may have a financial interest in such alternative investments. In working with clients, Altegris acts in its capacity as an SEC-registered Broker-Dealer and/or as a CFTC-registered Introducing Broker and CTA. Although Altegris may give securities-related advice that is incidental to its securities brokerage services, it is not an Investment Adviser. When acting as an Introducing Broker for individually managed accounts, Altegris receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. CTAs may also pay Altegris a portion of the fees they receive from accounts introduced to them by Altegris. When acting as a Broker-Dealer, Altegris enters into selling agreements with hedge funds and futures funds that it offers (including funds sponsored by affiliates), pursuant to which Altegris, with respect to the interests it sells, is paid a portion of the management and/or performance fees charged by the funds or their managers in respect of those interests. Altegris may also provide ongoing managed futures consulting services to its clients for a monthly service charge pursuant to individual managed account consulting arrangements.