We’re just a bit more than a month in and 2016 is already looking to be a bumpy year. While “market pros” use the mainstream media to assuage investor fears, alternative investors often tend to be contrarian by nature, and perhaps a bit more savvy. Jonathan Belanger, Director of Research for AlphaCore Capital, is in the latter camp: he thinks investors are generally underestimating risks in the stock and bond markets, while alternative strategies have the potential to protect capital – and this is the thesis of his recent white paper, titled Win More by Losing Less.
The World Has Evolved
The Internet Revolution has changed the way the world works as much (if not more than) its predecessor, the Industrial Revolution. Perhaps the former could even be seen as a continuation of the latter, as progress has been geometric or even exponential in the past 200 years, after millennia of comparatively little change. Just in the past 20 years, whole industries have been transformed and geopolitics and international finance bare virtually no resemblance to the world of a few decades past: and yet, investors still think a “60/40” buy-and-hold strategy is wise?
Mr. Belanger certainly does not. Instead, he favors a well-constructed portfolio combining significant exposure to alternatives and traditional investments. Such a portfolio, in his view, has the ability to outperform over time.
Uncompensated Risks in Traditional Portfolios
Many investors want to cling to the belief that a “diversified” portfolio of stocks and bonds will yield their traditional 8-10% over the long term, with bonds providing downside protection during bear markets for equities. These investors ignore mainstream projections that stocks are likely to earn just 0-3%, annualized, over the next ten years, and bonds around 2% per year. Ultra-low bond yields don’t provide much of a safety net, either, and in Belanger’s view, those expected returns don’t justify the risks.
There is very strong empirical evidence that equity valuations and bond yields are good predictors of future returns for stocks and bonds.
By contrast, a diversified portfolio that includes a variety of alternative strategies – each with low correlation to stocks and bonds, and to one another – should outperform. AlphaCore’s own approach to alternative investing allocates roughly half of assets to alternatives ranging from long/short equity to managed futures, and many other styles in between. The low correlations of these assets and strategies should help investors mitigate downside risk, especially in turbulent markets.
Alignment with Investors
AlphaCore invests its own money alongside its investors, which demonstrates the firm’s conviction in its own strategies. The company has established a track record of building portfolios with alternative investments over the course of different investing environments, giving it a unique edge as we enter this new cycle of the economy.
Jason Seagraves contributed to this article.