DIANE HARRISON

The Ups and Downs of Alternative Investing

THE UPS AND DOWNS OF ALTERNATIVE INVESTING

Advisers are gearing up for year-end allocation reviews with clients, and once again, dreading the inevitable
pushback from some over increasing or holding steady on alternative investments. Last year, while the S&P 500
returned north of 13%, the hedge fund index universe averaged between 2.5 6.1%, adding to the pressure for
advisers to keep their clients committed to alternatives.
Why is it so hard for investors to accept that alternative investments are supposed to behave differently than
traditional investments? When presented with the argument for including alternatives in a total portfolio, most
investors are hypothetically fine with the potential return streams offered by such investments diverging from the
traditional stocks and bonds paths. When both alternatives and traditional markets are on the upswing, investors
dont appear to second guess the directions their investments are taking. But, when the paths separate, and
alternatives are on the downswing, or merely lagging the upward trend of traditional markets, suddenly the whole
concept of having alternatives within a portfolio is up for discussion. While the following seems rather basic, much
like athletes practicing their sport for hours to build muscle memory, these points can reinforce advisers persuasive
mental memory of the role alternatives play in clients portfolios.
THE UPSIDE OF MINIMIZING THE DOWNSIDE
Alternatives can provide diversification and overall reduction in risk and volatility. Thats the crux of why they are
recommended to improve portfolio allocation. There are reams of research synopsis and charts available showing
that over the long-term, the addition of alternatives can add value and smooth volatility.

*Graph courtesy of Baird research not to scale.

PANEGYRIC MARKETING| OCTOBER 2015

DIANE HARRISON
The Ups and Downs of Alternative Investing

Yet when traditional markets are doing well while alternatives markets are doing less so, investors will ask their
advisers to trim exposure to alternatives, typically at the most inopportune times, when staying the course would be
their most prudent decision. They will say, Perhaps these things dont really help me? Maybe I should just redeem
before the situation gets worse and I give up more of the traditional markets gains? Advisers have had a tough
time combating this common investor concern. When alternatives markets are compared to a sustained bull market
phase in equities, the number of unhappy investors rises in proportion to the lag in performance of the alternatives
returns. Advisers need support in helping their clients to focus on the benefits of holding alternatives in their
portfolios before the dissatisfaction factor clouds the clients ability to hear them.
VOLATILITY CAN BE A GOOD THINGIF YOU CAN TAKE ADVANTAGE OF IT
Most investors have been conditioned to fear volatility and avoid it as much as possible, a good plan in traditional
markets. Conversely, many alternatives managers have designed specific strategies to take advantage of and exploit
volatility in their market approach. As the chart below shows, volatility is on the rise since Augusts dramatic spike,
and maintaining higher levels than at any point this year.

Source: Bloomberg.com, Chicago Board Options Exchange SPX Volatility Index

By weaving in alternatives that can capture the upside and mitigate the downside inherent in market volatility,
investors can improve their overall portfolio risk profileassuming they stay the course and dont decrease their
allocation to these alternatives. Advisers need to stay vigilant with their clients through all market cycles about
communicating the benefits of forgoing a little upside occasionally to protect against sharper downsides in overall
portfolio allocations.
ALTERNATIVES ARE NONCORRELATED WITH TRADITIONAL MARKETS.
Theory sounds fine when advisers explain how to mix in alternatives to create a stronger, more balanced portfolio.
The reality is a harder sell to clients when alternatives are in the red zone and stocks are still rising. To the endless
frustration of advisers and alternatives managers, clients seem to turn a deaf ear to the logic that a long/short
portfolio should lag in performance over a long-only portfolio when markets are rising. Equally frustrating is when
clients dont seem to accept that commodities, or managed futures, are generally moving differently from equities,
and are supposed to do so. The unnatural equities and bond markets of the past several years, controlled and
driven more by central banks than by economic principles, have added to this investor fallacy that rising markets
should carry all boats higher.
PANEGYRIC MARKETING| OCTOBER 2015

DIANE HARRISON
The Ups and Downs of Alternative Investing

TAKING THE LONG VIEW

Alternatives, like traditional investments, are meant to be evaluated through a full market cycle. Portfolios are built
to withstand market risks and perform over the long haul, through anticipated and unanticipated market
movements. Diversification is a concept almost all investors accept readily as a sound financial goaluntil the
alternatives slice of their portfolio is in decline, and they fall prey to the desire to trim the loss and pile on the
traditional portions that are outperforming. Unless a client is a short-term trading specialist, advisers need to
reinforce the concept of avoiding market timing across all categories of allocation, especially when volatility is on the
rise.
PROTECTING THE DOWNSIDE IS MORE CRITICAL THAN RIDING EVERY UPSIDE
Most wealthy individuals already subscribe to the stay rich mentality of conservative investing. Individuals who
want to get rich would be wise to emulate a similar, long-range view on building wealth through solid diversification
of assets combined with a stable, well-protected risk management process that allows for growth as well as limited
downside exposure. Pairing up with managers, both traditional and alternative, who share in this long-range view,
will contribute to peace of mind, clearer vision though market dips and pops, and a stronger portfolio. Advisers
should have these conversations with their clients frequently, and not just annually, to reinforce this goal through all
market phases, and help their clients remember what sold them on the process originally.

Diane Harrison is principal and owner of Panegyric

Marketing, a strategic marketing communications firm founded in 2002
and specializing in a wide range of writing services within the alternative
assets sector. She has over 20 years of expertise in hedge fund
marketing, investor relations, sales collateral, and a variety of thought
leadership deliverables. In 2015, Panegyric Marketing received AIs awards for Best Financial Services Marketing & Communications Firm,
Innovation in Asset Strategy, and Business Excellence in Strategy & Positioning Statements USA as well as M&A's Excellence in Financial
Services Marketing USA, and Best Financial Marketing Firm - USA. The firm also won consecutive year awards in 2013-14 as IHFAs
Innovative Marketing Firm of the Year and AIs Marketing Communications Firm of the Year- USA. A published author and speaker, Ms.
Harrisons work has appeared in many industry publications, both in print and on-line.
Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

PANEGYRIC MARKETING| OCTOBER 2015