As a professional investor, I am wary of the latest new investment fads. Most investment companies now agree, interest rates are likely to go up, and that’s a big negative for bond investments. Alternative investments are an increasingly popular investment option for investors seeking income and risk management in an environment where the risk associated with rising interest rates seems elevated with rates at historic lows.
Once the domain of private investment firms, Wall Street has jumped on the bandwagon with investments employing alternative strategies. These investments employ strategies designed to reduce correlation with equity investments.
If an investment is not based on conventional fundamental valuation metrics, then what might the effect of increasing allocations to these alternative strategies be? While I haven’t conducted, and can’t cite studies, I suspect this trend is exacerbating the erratic, if not inexplicable volatility in the stock market these days.
I’m advising long-term investors to hang on tight. Aggressive investors might want to increase their tactical tilt. On the other hand, conservative investors might want to lean toward safety to avoid liquidating investments on unfavorable terms. The right balance is a function of valuation and liquidity needs.
Disclosure: Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.