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Alternative Investments Provided Portfolio Stability During Recent Correction

While the equities market experienced a wild swing in late August, alternative investments and related exchange traded funds provided some with a more stable return during the sudden market correction.

Potential investors should be aware that alternative investments are not meant as growth strategies to generate outsized returns in investment portfolios. In reality, these strategies are doing exactly what they were made for, diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, alts can shine.

Alternatives “should provide diversification from equities, which tend to be responsible for most of the risk in investor portfolios, and ideally will protect better on the downside than stocks while allowing for some upside participation,” writes Josh Charlson, director of manager research for alternatives strategies for Morningstar. “But most of these types of funds do have exposure to the markets–sometimes through direct stock market investments, at times through exposure to other global asset classes–so in a sell-off as widespread and steep as we saw in late August, you shouldn’t expect complete immunity.”

In the recent market oscillation, Charlson argues that liquid alternatives performed will within expectations. Specifically, between August 17 and August 24, bear market strategies outperformed, returning an average 14.5%.

For instance, the AdvisorShares Ranger Equity Bear ETF (HDGE) , which tries to generate capital appreciation through short sales of domestic equities, rose 14.7% over the same period.

Additionally, managed futures were the second-best performing category from August 17 to August 24, according to Charlson. For instance, the WisdomTree Managed Futures Strategy Fund (WDTI) dipped 0.2%, First Trust Morningstar Managed Futures Strategy Fund (FMF) fell 1.4% and ProShares Managed Futures Strategy (FUTS) was up 1.1%.

“Managed-futures strategies tend to have very low, and even negative, correlations to the stock market; they gained notice after 2008, when the small number of mutual funds in the category and their many hedge fund counterparts held up very well,” Charlson said.

Others were also only slight lower over the period. For instance, the First Trust Long/Short Equity ETF (FTLS) decreased 6.0 and ProShares RAFI Long/Short ETF (RALS) was 0.3% higher. These long/short strategies take both long positions in U.S. equities and pare bets with short positions.

Investors can also take a look at ETFs that track a basket of alternative investment strategies. For instance, the newer PowerShares Multi-Strategy Alternative Portfolio (LALT) and ProShares Morningstar Alternatives Solution ETF (ALTS) . Specifically, ALTS employs long-short strategies, hedge fund replication, managed futures, global infrastructure, merger & acquisitions, private equities and Treasury spread investments. The actively managed LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. Over the period, LALT fell 0.7% and ALTS declined 3.9%. [Alternative Investments, ETFs Are Increasingly Popular]

In contrast, the S&P 500 dropped 8.9% from August 17 through August 24.

For more information on alts investments, visit our alternatives category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.