Clearing Up Some Misconceptions

While this is a bit of self-promotion, I recently wrote an article for Investment Advisor’s November issue, concerning the daunting challenge facing advisors today. That is, how to generate real returns sufficient to meet the needs of clients over the next decade or so, given stretched valuations across all major asset classes, while protecting against the inevitability of bear markets and black swans.

Alternative strategies immediately come to mind because of the diversification and hedging properties that they are known to provide. But there is widespread confusion about alternatives that needs to be remedied.

For starters, there is the categorization issue. The problem is that asset classes, vehicles, and strategies are all being confused. Asset classes are what you invest in, and at the most basic level, there are only four: equity, debt, commodities and currencies. Vehicles, like mutual funds, ETFs or hedge funds/LPs, are the legal structures. While strategies consist of the ways in which you invest in asset classes within a legal structure.

We believe that alternatives are neither defined at the asset class level, nor at the vehicle level, but rather, at the strategy level. Alternatives such as long/short equity, managed futures or global macro, are simply different ways to invest in equities, debt, commodities and currencies.

But does it really matter what we call these things? If investors focus on the risk exposures that each investment contributes to the portfolio, then no, it doesn’t matter. But too often, we find that investors do make decisions based on labels, and they frequently compartmentalize their decisions, with asset allocation and manager selection occurring in isolation.

Read more in Charting a New Course