‘Tis the Season for Diversification

This fall has been a challenging season for equities. In October, the S&P 500 Index declined approximately 9%,1 while volatility, as represented by the VIX Index, more than doubled.1 And November hasn’t been much better, with some stock indexes approaching double-digit losses for the year as we enter December.2 This behavior serves as yet another reminder that equity markets are often volatile and can go down just as easily as they can go up. Given this recent and vivid demonstration, I believe investors (and their portfolios) should consider the potential benefits of allocating to alternatives.

Uncertainty breeds volatility

This reminder is very timely, given that the current US bull market, already the longest in history, is approaching its 10th year. Importantly, I believe investors should be preparing for a more challenging environment going forward; namely, an environment characterized by lower equity returns and increased volatility. Just consider all the currently “pending” events (Brexit, Iran, mid-term election fallout, North Korea, the caravan, etc.) — any of these could potentially move markets. By preparing their portfolios proactively, investors may avoid the common mistake of investing reactively and after the fact.

I believe alternatives offer far greater flexibility in their investment strategies than traditional equity and fixed income investments. Portfolio managers using alternatives can invest on both a long and short basis, and can invest across multiple asset classes. As a result, they have the potential to generate returns that are unique and can be uncorrelated to those of traditional equity and fixed income investments.

Understanding different alternative strategies

Everyone’s investment objectives are different, but for many, limiting downside risk through diversification is a common goal. In preparing for what I believe to be a more challenging market environment, investors may wish to consider the following types of alternative strategies, all of which can be accessed via mutual funds: