The case for alternative investments in 2014


Not being fully invested in large-cap U.S. stocks only resulted in lower returns this year with the S&P 500 enjoying a nearly 30% gain.

Yet investors worried the rally in U.S. stocks is growing long in the tooth are looking at alternative investments as a way to diversify and potentially make money during a market correction.

“Alternatives should be part of all investor portfolios to some extent,” says Dan Beckerman, CFP and the president of Beckerman Institutional who manages the Asset Allocation portfolio on Covestor.

He thinks the traditional 60/40 stocks/bond model portfolio used by many brokerage firms is “broken” and needs to be updated for risk and reward.

Alternatives are a broad category outside traditional assets like stocks, bonds and cash.

Alternative assets include commodities, currencies, real estate, private equity and even more esoteric, illiquid investments such as art and classic cars.

Additionally, some hedge funds use so-called alternative strategies such as long-short, arbitrage and managed futures.

There was more than $5 trillion in global alternative assets in 2013, according to consultant Towers Watson.

“Alternatives are a becoming a more important part of the investing landscape,” Beckerman said during a recent webinar hosted by Opal Financial Group.

After the financial crisis, some investors are looking at alternatives as a way to protect themselves in a crash, and diversify their stock and bond portfolios.

Still, there are concerns the very popularity of alternative investments is lowering their diversifying properties.

Ari I. Weinberg reported earlier this year for

Market watchers are wondering if these investments will once again tend to zig when stocks zag—or whether something has changed to doom the “alternative” nature of alternative investing. One concern is that these investments may be moving more in sync with stocks in part because they have become more accessible, popular and easily traded, most recently through exchange-traded funds.

Of course, an alternative fund is only as good as the strategy or skill of the portfolio manager.

Beckerman said correlations with stocks also vary by the particular alternative strategy. He’s found that managed futures strategies have very low correlations to the S&P 500 and are good diversifiers. In Asset Allocation portfolio, he owns WisdomTree Managed Futures Strategy Fund (WDTI), an ETF.

“U.S. equities have already had a good run, and bonds are in a tight spot due to very low interest rates,” Beckerman said. “Sophisticated investors are increasing their exposure to alternatives.”

“With the stock market at new highs, and a P/E trending to the 20’s, I’m not confident corporate earnings alone can continue to propel this market up,” added Bill DeShurko, who manages the Seasonal ETF Growth and Dividend and Income Plus portfolios on Covestor, in a Wealth Management report. “So I’m looking at alternatives.”

Photo Credit: visualpanic

DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.