Morningstar Advisor - June/July 2013 - (Page 40)
Spotlight
Using Alternatives in Practice
By Jerry Kerns
Advisors and clients need to understand what they’re buying
and the role a strategy has in a portfolio.
The number of liquid alternatives offerings has
skyrocketed since the 2008 financial crisis. Not
satisfied with the performance of their
traditional stock and bond portfolios, many
advisors and investors have sought out the
sophisticated strategies that hedge funds and
institutional investors have been using for
decades. Mutual fund and exchange-tradedfund firms quickly answered the call. The fund
industry has launched hundreds of alternative
offerings of varying strategies and asset
classes over the past five years. To get a
practical view of this burgeoning segment of
the industry, we interviewed three professionals who have many years of experience
investing in alternatives for clients.
Bradley Alford founded Alpha Capital
Management in 2006, a registered investment
advisor based in Atlanta. He is the portfolio
manager of Alpha Opportunistic Growth ACOPX
and Alpha Defensive Growth ACDEX. Richard
Raby is a portfolio manager for Creative
Financial Group, also based in Atlanta. The firm
provides financial planning and investment
advisory services for high-net-worth clients.
Richard Bregman is the founder and CEO of
MJB Asset Management, a RIA firm based in
New York City.
The three will appear together June 13
at the 2013 Morningstar Investment Conference
in Chicago.
40 Morningstar Advisor June/July 2013
Jerry Kerns: What is your definition of an
alternative investment?
Bradley Alford: The term alternative invest-
ment is used to describe both asset
classes and investment strategies. Alternative
asset classes are those other than the three
traditional asset classes, which are stocks,
bonds, and cash. Examples of alternative asset
classes are private equity, real assets,
and commodities. Alternative strategies are
those that use management techniques other
than long-only, such as leverage and short
selling. The term hedge fund is generally used
to describe the vast array of alternative
investment strategies. It’s worth highlighting
that alternative investment strategies are
implemented using traditional asset classes, as
well as alternative asset classes.
Richard Raby: An alternative investment is any
investment outside the standard, long-only
investments in equities and fixed income. This
would include precious metals, futures, short
positions, options, and asset-allocation
strategies that can use those same vehicles.
there are three categories of investments:
equity (ownership), debt (lending), and
insurance (short sales and derivatives).
So-called long positions in equity and debt are
typically referred to as traditional investments;
alternatives incorporate that third category—
insurance as a hedge against security,
industry, and systemic risks. Alternatives by
themselves are not an asset class. For example,
from this perspective, a long-only commodities
fund is a traditional equity portfolio in that
you own a basket of stocks, metals, or
contracts. Long-only REIT funds are traditional
equity funds because you own positions in
REITs. An emerging-markets bond fund is a
traditional fixed-income portfolio because you
are lending to emerging country governments
or corporations. By contrast, a long/short
commodities fund, or a long/short REIT fund, or
a long/short emerging-markets bond fund
is an alternative strategy, as the funds contain
traditional positions in stocks and bonds
but also contain short positions as insurance.
Adding that third category—insurance—
typically will reduce correlations with
traditional strategies and reduce volatility
relative to traditional strategies.
Richard Bregman: Alternatives are not
investments per se, but rather are strategies
that incorporate some element of hedging,
whether through individual short sales
or by use of derivatives, such as options,
futures, swaps, etc. From this perspective,
Kerns: What role should alternative investments play in a portfolio?
Alford: Alternative investments are intended
to generate returns that are far less dependent
Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2013
Morningstar Advisor - June/July 2013
Contents
Contributors
Letter From the Editor
Not Your Values
How Do You Use Alternatives for Clients?
Working to Build a Niche
How to Put Buffett’s Investing Philosophy into Practice
Sophisticated Strategies for the Masses
Investments á la Carte
Investment Briefs
The Percentile Trap
Defense Firms Will Stay Aloft
Beware the Lure of Diversification
Using Alternatives in Practice
Managed Futures and Cash Rates
The World Is Getting Grayer
Waiting to Pull Up Anchor
The Price of Managing Volatility
Let’s Get Back to Basics
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Mutual Fund Urban Myths
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