InFocus: Alternative Investment Solutions

Alternatives Investment Strategies - Balancing risk with return

Alternatives Investment Strategies - Balancing risk with return

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Since the credit crisis of 2008, advisors have struggled to balance risk with return from traditional fixed income and equity investment products. Equities have been in a seven-year bull run, and fixed income a 35-year bull run, while interest rates are at all-time lows. Assets that used to be uncorrelated are much more correlated today.

Becoming increasingly popular in this environment are alternative investment strategies. No longer the high-risk investments of years gone by, they offer precise investment tools that have the potential to deliver a range of desirable investment outcomes, such as volatility management, downside protection, diversification, and interest rate protection.

According to John Wilson, chief executive officer and co-chief investment officer at Sprott Asset Management, there has been a “sea change” in investor priorities away from “beating the market” and towards “protecting my capital”. As such, he believes that advisors need to sit up and take notice by considering alternative strategies as part of their approach to clients’ portfolios.

“Traditional risk management of equity portfolios was to balance equity exposure with fixed income,” he said. “This worked exceptionally well over the past few decades as bond yields dropped from the high teens in the early 1980s. Over that period, bonds maintained negative correlation to equities (rising in price when stocks dropped), generated an income, and benefited from a generational capital gain tailwind of dropping rates.

“Today, however, traditional bond portfolios don’t offer any of those benefits: yields are very low, rates are likely to rise not fall (eventually) and bond prices have started to move more in sync with stocks (every market is driven by the Fed).  Alternative strategies offer other ways to generate return while managing risk now that the traditional ‘balanced’ model is broken.”

Indeed, alternative investment strategies are now even being used within mutual fund products, creating greater access to these methods while ensuring daily liquidity for the investor.

“Mutual funds allow alternative strategies to be offered in a prospectus vehicle as long as the strategy complies with specified regulatory limits on tools such as leverage, short selling and the use of options,” continued Wilson. 

“As long as the alternative strategy is liquid enough to manage the potential for daily subscriptions and redemptions, and complies with the regulatory limits on the tools used, the mutual fund is a much easier, more accessible way for investors to use alternative strategies.”

Over the next five days, Wealth Professional and Sprott Asset Management will present an In-Focus special examining alternative strategies including fixed income, equities, innovative alternative income strategies and Real Assets.

For a look at seven ways an alternative fixed income strategy can outperform, download the thought paper at sprott.com/unconstrained.
 

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Sprott Asset Management is a Toronto-based asset management company that is dedicated to being the most innovative fund company in Canada. Through our diversified offering of mutual funds, hedge funds, physical bullion funds and specialty products, we give financial advisors unique investment solutions that can help them to differentiate their businesses and add significant value to their clients’ portfolios.