When investors think about a diversified portfolio, they usually consider it some combination of stocks, bonds, and cash. Alternative assets and strategies don’t often enter the calculus, but they should. That is the belief of Shana Sissel, the Founder and President of Banríon Capital, which specializes in helping advisors develop strategies involving alternative investments and putting them inside client portfolios.
Sissel believes that many people view alternatives incorrectly. Investors often think of them as something to throw into a broader portfolio, but they don’t think of them as part of a core strategy. They think of them as a tactical diversifier, but not a core diversifier in the same way they view fixed income. People view alts a little differently today because they’ve learned over the past year that stocks and bonds can fall together and bad things can happen at the same time. Sissel’s portfolios haven’t experienced nearly the same level of negative performance because her alternative positions have performed really well and diversified away risk at the same time.
Sissel feels that alts have not caught on in recent years because during long, drawn-out bull markets, hedged products don’t seem very sexy or particularly useful. Because they have a tendency to be more complex and the time frames in which they outperform tend to be shorter, investors often just default to fixed income for protection. Alts are meant to provide true diversification. She notes that over the past 10 years, if you had a 20% allocation to a diversified portfolio of alternatives, you would have outperformed the traditional 60/40 portfolio by about 50 basis points annually while reducing overall risk by around 300 basis points.
Sissel believes that portfolios should contain a 20% allocation to alts, although she acknowledges that some studies think a 30-35% allocation could provide peak benefits. Within that 20% sleeve, she generally targets four strategies with equal weights – long/short equity (BTAL), tactical commodities (FTGC), global long/short credit (LMAOX) and global macro (QGMIX). This is what she would consider the completely liquid “available to everyone” alt strategy. She likes BTAL in particular because it’s got a clear objective and works great as a hedge.
Sissel is also a believer in managed futures. People should consider exposure to three areas – hedge funds, private equity/debt and CTAs/managed futures. Admittedly, there are not a lot of great CTA offerings in the fund world. There are some better macro offerings and those tend to perform similarly. CTAs should be a core allocation in any alt portfolio.
Other key takeaways:
- Sissel doesn’t approach rebalancing in alts any differently than rebalancing equities or fixed income. Rebalancing semi-annually or annually generally works best.
- REITs, MLPs and covered call strategies aren’t alts. They’re part of equities.
- The number one misconception about alts is that they are expensive. There is a higher cost to implementing a long/short strategy, but it’s not bad and the benefits are worth it.
- When implementing an alternatives strategy, you should look for funds that are uncorrelated and the correlations with each other should also be considered. Those make the best diversifiers.
- Volatility products could be useful and do offer some diversification benefits, but they have to be implemented thoughtfully. Moves in the VIX tend to be very short-term in nature and that requires better timing. There’s some possibility with VIX products as part of a broader alts strategy.
- What leads you to the conclusion that an alt is a good alternative? Sissel doesn’t mind passing on something that’s good if she can avoid the things that are bad. She’s leery of something that’s consistently good versus something that’s consistently bad. If it sounds too good to be true, it probably is.
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