How multi-alternative funds may eliminate choice overload for investors
In my most recent blog, I described how choosing the appropriate alternative strategy (Real estate? Market neutral? Senior loans?) could become the biggest challenge for new investors in alternatives. This is one of the most common questions I receive here at Invesco, along with how to identify the best fund managers and how to select specific alt funds for a portfolio. This three-part dilemma speaks to the challenge of navigating the multi-faceted world of alternative investments.
I have written previously about the potential benefits that alternatives may deliver, be it boosting returns, reducing risk, providing diversification or delivering uniquely timed returns. However, it is much harder to select the specific investment that may best fulfill a given set of individual objectives. There are three reasons why:
- Strategy. The world of alternatives comprises a wide variety of investment strategies, each with its own unique approach and investment characteristics. For the inexperienced alts investor, it can be very difficult to identify which alternative strategies have the desired investment characteristics. (To help investors navigate this issue, Invesco has created an investment framework that aligns common investment objectives with the various alternatives that may potentially meet those objectives.)
- Manager. Manager selection is critical when investing in alternatives as there has historically been a wide dispersion in returns between the top and bottom performers. For example: From Jan. 1, 2013, through Dec. 31, 2017, the top quartile of alternative long/short equity funds returned 8.41%, while the bottom quartile returned 4.66%. This is a gap of 375 basis points.1 While there is no guarantee this past performance will be repeated, one major challenge is to figure out a way to invest with the top managers while avoiding underperforming managers.
- Fund. After identifying the desired strategy and portfolio manager, a specific fund needs to be selected. This can be complicated — it’s not unusual for a manager to offer more than one fund for a particular strategy. In such cases, the differences between the various funds must be reviewed in order to determine which may be most appropriate given current investment objectives. At that point, investors could seek to identify those funds they believe may be able to successfully implement their strategy on an ongoing basis.
Multi-alternative funds may offer a one-stop solution
One way to potentially navigate these issues is by investing in a multi-alternative fund overseen by an experienced alternatives manager.
Morningstar defines multi-alternative funds as funds that “use a combination of alternative strategies such as taking long and short positions in equity and debt, trading futures, or using convertible arbitrage, among others. Funds in this category have a majority of their assets exposed to alternative strategies and include both funds with static allocations to alternative strategies and funds tactically allocating among alternative strategies and asset classes.”
Given their ability to allocate across multiple strategies and funds, multi-alternative funds may offer a “one-stop shop” approach to investing in alternatives. As such, these funds may relieve the investor from navigating many of the complex issues surrounding an investment in alternatives.
While multi-alternative funds have many potential benefits, they also have some limitations. In my opinion, the biggest limitation is the investor cedes control and forfeits the ability to tailor their investment to their unique needs. For example, if volatility rises, an investor may want to potentially take advantage of that by investing in global macro funds, while the multi-alternative manager may be more concerned about capital preservation and be heavily invested in market neutral funds.
This example captures the trade-off investors make when investing in a multi-alternative fund. Namely, investors outsource the complex investment decisions to an expert, but lose the ability to tailor the exposure to match their market view or meet their unique investment needs.
In summary, multi-alternative funds such as Invesco Alternative Strategies Fund (LQLAX) may offer investors a simple way to gain exposure to alternatives, especially for investors new to this asset class. However, more experienced and knowledgeable investors may prefer investing directly in specific funds in order to tailor their investment to their unique investment objectives.
1 Source: Morningstar, as of Jan. 23, 2018
Alternatives Investment Strategist
As Alternatives Investment Strategist, Walter Davis serves as Invesco’s primary alternatives representative to retail, high net worth and institutional clients across the major broker dealers, wirehouses and RIAs. He is responsible for collaborating across Invesco’s alternative strategies to develop a cohesive alternatives education program for financial advisors and investors.
Prior to joining Invesco in 2014, Mr. Davis served as a managing director in Morgan Stanley’s Alternative Investments Department, and earlier as director of High Net Worth and Institutional Sales. Prior to Morgan Stanley, he worked at Chase Manhattan Bank in the Alternative Investments Department. He has worked in the industry since 1991.
Mr. Davis graduated cum laude with a BA in economics from the University of the South. He earned an MBA in finance and international business from Columbia Business School. He holds the Series 3, 7, 24 and 63 registrations.
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Diversification does not guarantee a profit or eliminate the risk of loss.
Alternative products typically hold more nontraditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC, investment adviser. Invesco PowerShares Capital Management LLC (PowerShares) and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
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