New Choices for New Challenges – The Case for Liquid Alternatives
Introduction: A search for new solutions
Investors are looking to advisors for new solutions that seek to protect portfolios from market extremes and, ultimately, help preserve wealth. In a 2011 study by Cerulli Associates, 22.7 percent of all households indicated that their greatest personal concern was protecting the current level of their wealth – underscoring just how defensive investors have become.
Over the past five years, asset classes have become increasingly correlated. We believe that traditional diversification approaches may not provide an effective or consistent enough “shock absorber” to ease many investors’ qualms. In our opinion, there is no question that investors and advisors who want to improve portfolio stability should consider “diversifying harder” – that is, expanding their investment universe into new areas via alternative investment strategies. The challenge is that, historically, alternatives have typically been illiquid, opaque, and difficult to tap for all but the most sophisticated and wealthy investors. However, new approaches are making the alternative investment process more straightforward and accessible. In fact, in a recent report, consulting firm McKinsey & Co. stated that “alternatives…are becoming part of the investment management mainstream.”
In this paper, we review the demonstrated portfolio benefits and potential trade-offs of alternative investments and examine the emerging advantages of liquid structures, which bring powerful new efficiency and flexibility to alternative assets.
You should consider the investment objectives, risks, fees and expenses of any exchange-traded fund or mutual carefully before investing. This and other important information is available in the funds’ prospectus and summary prospectuses, which you may obtain at the appropriate funds’ websites. Please read the prospectus and summary prospectuses carefully before investing.
The information, analysis, and opinions expressed herein are for general information only. Nothing contained in this brochure is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investing carries certain risks and there is no assurance that investing in accordance with the portfolios mentioned will provide positive performance over any period of time. Investors could lose money if they invest in accordance with the portfolios discussed herein. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment vehicle. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Past performance is not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns.
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