Consider the alternatives

Have you ever found yourself deeply engrained in a puzzle that ultimately could never be finished on the account of a missing piece? Many investors may be feeling a similar frustration. An uncertain economic and policy outlook (will there be a recession or not; is the Fed finished or not, etc.) is playing havoc with traditional stock-bond portfolios, as evidenced by the negative returns month-to-date in both the S&P 500 and Bloomberg US Agg Indexes. This has many long-term investors wondering if they’re missing an important piece to their financial puzzle that can help them reach goals and sleep better at night.

One possible option are alternative investments. They may sound exotic but that’s not always the case. Under the surface, many are nothing more than a mix of stocks, bonds and derivatives of such (think put and call options). What makes them different from typical stock and bond funds is they seek to deliver potential returns uncorrelated to their respective markets. In many ways, they represent the ultimate active strategy. Instead of following popular benchmark indexes, they rely on fundamental and technical security selection variables to pursue their goals.

That means the potential risk and returns of the alternative investments are not predicated on the general direction of the markets in which the portfolio managers invest but on the performance and positioning of the securities that are selected. For example, in an alternative stock fund, the portfolio managers may seek to purchase stocks they think could outperform going forward (long positions) and sell borrowed stocks they believe may underperform (short positions). It’s all about the securities, not the market.

This is just one example of an alternative investment. Others can center around bonds, real estate, commodities, private markets or other assets. Some can be deeply complex and present timing risk. They may take a contrarian view to consensus, amplify the consensus view or ignore it altogether. But the goal is to generate returns without concern for broad market risk in the areas in which they invest. If done successfully, such an approach may offer a missing piece in an uncertain investing environment that continues to disrupt traditional stock-bond portfolios.