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Diversify with Liquid Alternative ETFs


Investors can now access multi-strategy alternative strategies once catered toward institutional investors through exchange traded funds to diminish market volatility and mitigate potential dips in traditional asset classes.

On the recent webcast, Liquid Alternatives: Bridging the Gap for Retail Investors, John G. Feyerer, V.P. of Product Management for Invesco PowerShares, argues that alternative investments offer uncorrelated returns to potentially enhance a portfolio and help diminish volatility. The majority of financial advisors are seeking ways to manage risk going forward. [Alternative ETF Strategies To Reduce Portfolio Risk]


“A closer look at risk/return reveals that some alternatives have served as return-enhancers and others as risk reducers,” Feyerer said.

Traditionally, these alts strategies have been limited to institutional class investors due to the factors like liquidity, tax efficiency, transparency, high cost and minimum investments. However, the ETF wrapper is a democratizing factor.

“Vehicles such as ETFs break down barriers, representing a transformative change for asset allocation and portfolio construction,” Feyerer added.

For instance, the actively managed PowerShares Multi-Strategy Alternative Portfolio (LALT) tries to provide positive total return with a low correlation to broad securities and can be used as a fixed-income substitute. LALT holds a combination of equities, along with financial future contracts, forward currency contracts and other securities. [A Liquid Alts ETF Idea for the Second Half]

The actively managed PowerShares S&P 500 Downside Hedged Portfolio (PHDG) tries to generate positive total returns in a rising or falling market. PHDG can act as an equity substitute to help provide uncorrelated returns to broad equity markets.

“While balanced growth can be pursued with a traditional 60/40 approach, it can be further enhanced with a multi-strategy alternatives allocation whose strategy supports volatility management,” Ted Samulowitz, V.P. and Portfolio Manager for Invesco PowerShares, said.

Jason Stoneberg, V.P. and Director of Research for Invesco PowerShares, points out that liquid alternative investments have experienced a compound aggregate growth rate of 28% over the past decade, accumulating $747 billion in assets in 2013 from $61 billion in 2003.

Meanwhile, the number of alternative ETFs, which track currencies, real estate, commodities, managed futures and long/short, among others, have increased from one in 2004 to 450 options in 2014.

The liquid alts space could continue to grow as more investors gain access to the space. Stoneberg points out that institutional investors have a little less than 25% allocated toward alternatives, whereas retail investors make up less than 5%. The main barrier to entry is the so-called Knowledge Gap, and more education will be needed to help investors make an informed decision as a recent poll of financial advisors showed.


Financial advisors who are interested in learning more about alternative investment strategies can listen to the webcast here on demand.