Alternatives Can Deliver Uncorrelated Alpha

What Are Alternative Investments?

Alternatives are defined broadly as investments that fall outside of the conventional asset classes of stocks, bonds and cash. Alternatives can be tangible assets like real estate, gold and currencies, or professional investment strategies such as long/short investing and momentum buying.

Since alternatives have a history of generating returns that have a low or negative correlation to traditional markets—meaning they are less tied to the movement of stocks and bonds—they can help improve returns and potentially reduce risk when added to a diversified portfolio.

Alternatives can help lower portfolio volatility

Past performance is not a guarantee of future results. Both the Traditional Portfolio and the Mixed Portfolio are presented for hypothetical purposes only and do not represent the performance of any particular investment.  See below for additional chart information. 

 

Three Widely Used Alternative Strategies

There are many types of alternative assets and strategies. Three of the most common include:

  • Hedge Fund Strategies: These strategies seek to generate positive returns, regardless of the direction of traditional stock and bond markets. They include market-neutral, global macro and event-driven strategies.
  • Commodities: Energy, metals, food and agriculture are some of the more popular types of commodity investments.
  • Managed Futures: This alternative strategy involves the trading of futures contracts and other related instruments with exposure generally allocated across four major asset classes—commodities, currencies, fixed income and equities.

Each of these strategies offers return potential independent of traditional stock and bond markets, which is especially important in times of market uncertainty. By adding alternatives to their portfolios, investors may enhance diversification and potentially increase the performance and stability of their portfolios.

Access Alternative Investments Today

Once accessible to only large institutions and other high-net-worth investors, exposure to these alternative investments is now available to any investor in a mutual fund. Alternative mutual funds can deliver access to a broad universe of alternative assets and strategies. Plus, they offer professional money management, daily liquidity, low minimums, and no net worth requirements.

Past performance is not a guarantee of future results. Both the Traditional Portfolio and the Mixed Portfolio are presented for hypothetical purposes only and do not represent the performance of any particular investment. The Traditional Portfolio is comprised of 60% stocks and 40% bonds. The Mixed Portfolio has an equal weighting of traditional asset classes (stocks, bonds and cash) and alternative investments (managed futures, commodities and hedge funds). Stocks are represented by the S&P 500 Index. Bonds are represented by the Barclays Capital Aggregate Bond Index. Commodities are represented by the S&P GSCI Index. Hedge funds are represented by the HFRI Fund Weighted Composite Index. Managed futures are represented by the S&P’s Diversified Trends Indicator (“S&P DTI”). Cash is represented by the Citigroup 3-month T-bill Index. The index returns do not include any management fees, transaction costs or expenses. The indices are unmanaged and are not available for direct investment. For more information on the indices, please see below.

The S&P 500 Index is an unmanaged, broad-based, market-cap weighted index of 500 stocks. The Barclays Capital Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The S&P GSCI Index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets. The HFRI Fund Weighted Composite Index is an equal weighted index which includes over 2000 domestic and offshore constituent hedge funds with at least $50 millions under management or which have been actively trading for at least twelve months. The S&P’s Diversified Trends Indicator (“S&P DTI”) is a diversified composite of commodity and financial futures designed to provide exposure to major global market trends. The S&P DTI is a composite of 24 highly liquid futures grouped into 14 sectors, evenly weighted between financials and physical commodities.

Diversification does not guarantee a profit nor does it protect against loss.

Notes on Risk: The commodity and hedge fund-linked derivative instruments in which the Fund invests have substantial risks, including risk of loss of a significant portion of their principal value. Commodity and hedge fund-linked derivative instruments may be more volatile and less liquid than the underlying instruments and their value will be affected by the performance of the commodity markets or underlying hedge funds, as well as overall market movements and other factors. Commodity and hedge fund exposure may also subject the Fund to greater volatility than investing in traditional securities. The value of commodity-linked derivative instruments may be affected by commodity index volatility, changes in interest rates, or events affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The hedge funds comprising a hedge fund index invest in and may actively trade securities and other financial instruments using a variety of strategies and investment techniques that may involve significant risks. Managed futures involve going long or short in futures contracts and futures-related instruments. If the Fund’s investment advisor uses a future or other derivative instrument at the wrong time or judges market conditions incorrectly, use of such instruments may result in a significant loss to the Fund. The Fund could also experience losses if the prices of its futures or other derivative instruments were not properly correlated with other investments. Managed futures instruments and some other derivatives the Fund buys involve a degree of leverage. The Fund’s use of certain economically leveraged futures and other derivatives can result in a loss substantially greater than the amount invested in the futures or other derivatives. Certain futures and other derivatives have the potential for unlimited loss, regardless of the size of the initial investment. When the Fund uses futures and other derivatives for leverage, a shareholder’s investment in the Fund will tend to be more volatile, resulting in larger gains or losses in response to the fluctuating prices of the Fund’s investments.