Our survey shows the role of alternatives in portfolios is likely to increase—But the language needs to change.

We asked Prosek Partners to conduct a survey of a random selection of attendees at our SIC15 held in May. The topic, of course, was the Role of Alternatives in Future Portfolios. 124 of the 649 attendees were asked a series of questions regarding their use of alternatives and some of the issues affecting their decision processes. One has to say that even though this was a random sample of attendees, almost all the attendees were relatively sophisticated institutional and individual investors and advisors, who were there to listen to a variety of observers and analysts of the global markets, economies, and geopolitics. We have commented on some of the observations at the conference, and you will be seeing videos on the Altegris site beginning June 24. These were not novices when it comes to alternative investments. Every attendee interviewed had some participation in alternatives, with different reasons for their use from complements to traditional strategies, substitutes for traditional equity or bond allocations to hedges against volatility.

70% of the advisors, 69% of the private investors and 63% of the institutions expect to have a net increase in their alternative holdings in the second half of 2015. This may reflect the tone of uncertainties expressed by the speakers at the conference regarding where expected market returns may come from and the possible volatility associated with them.  Highest on the list for advisors and private investors are Managed Futures/Global Macro (33%) while institutions put Private Equity (36%) at the top of the list.  Private Equity (25%) and Long/Short Equity (21%) are also high for advisors and private investors while the institutions put Managed futures/Macro (20%) and Long/Short Equity (20%) next on their list. Interestingly, there were also some expected decreases in all categories: Private Equity, Long/Short Equity, Managed Futures/Macro and Alternative Fixed Income with some investors increasing and decreasing the same strategies. I would read into this a fairly active approach to using alternatives in the portfolios with some concerns about the markets in general—in particular, the fixed income markets. This was certainly the anecdotal tone among attendees away from the hard numbers in the survey.

The survey participants were also asked what percent of a portfolio should be in alternatives. 10-25% was the most common range (59%). Interestingly, 15% indicated 25-50% as the range, while 3% indicated the allocation should be above 50%. We have seen certain institutions, endowments in particular, move toward having alternatives as a core of their allocations with more tactical allocations for long only active managers and straight beta plays using ETFs. It is interesting to see suggestions of higher allocations to alternatives coming from advisors and private investors.

Of particular interest to us were a series of questions regarding attributes of importance and concerns in making investments in alternatives. Clarity Regarding Investment Philosophy and Strategy ranked highest (60%) among attributes and second among concerns (24%) with Lack of Education on the Product Offerings (10%) being the third most significant concern. Among concerns, fees (53%, but 80% among Advisors), was the highest. This has been a high concern for the whole time I have been in the industry. And, with some democratization as well as Moore’s Law at work, the universe of strategies that do justify the fees on a net return basis continues to shrink.

Clearly the industry has some work to do explaining the strategies and positioning them appropriately in portfolios. The term “alternatives” may be part of the problem. This is hard for me to say given that it is an integral part of our name. It has come to represent a multitude of strategies within the investment universe and carries with it a tinge of the exotic. Merriam-Webster describes an alternative as: “different from the usual or conventional. Existing or functioning outside the established cultural, social, or economic system.” That makes it a little scary for some—or maybe for most. In truth, most of these alternative strategies are simply investment approaches that carry different degrees of risk, correlation and sometimes, liquidity, within the classic 60/40 stock/bond allocations. Others, such as true managed futures and absolute return strategies, provide uncorrelated return and risk streams to these classic allocations.  The decisions one makes on including such “alternatives” are not too different from deciding how much to allocate between a small-cap growth strategy or large-cap value in equities, or between high yield and investment grade in the bond world. I can remember when a deviation from the center of the classic style boxes was viewed as exotic and “alternative.”  Every strategy carries with it a different risk and return profile, and allocations should adjust according to the specific needs of the investor.  Given an investor’s goals and desired outcomes, it could be that various “alternative” strategies might offer better ways of achieving them. We have a responsibility to add investment clarity to make this a more complete picture as opposed to an exotic one.   The survey provided some surprises, even for us, with some very positive messages given our focus. It also pointed out, even among a sophisticated group of investors, there is work to do. We are Paying Attention.