About Alternatives

About Alternatives

The severe market downturns of 2000–2002 and 2008 have brought increased attention to the risk and return characteristics of alternative investments. Alternative investments are not new — some have their roots going back many decades. However, what is new is the heightened awareness of what they can add to an investment portfolio, as well as the increased number of products in the marketplace allowing accessibility among a wider range of investors.

Alternative investments can be broadly defined as those that are not traditional investments such as stocks, bonds, or cash equivalents like CDs or money markets. Types of investments that fall into the category of alternatives include hedge funds and managed futures — to name just two.

Alternative Investments can have several attractive characteristics. Two examples are:

Return Opportunities Regardless
of Overall Market Direction 		Potential to Reduce Portfolio
Volatility Via Non-Correlated Returns
  • Traditional investments like stocks and bonds are generally reliant on rising markets to profit.
  • Alternative investments can pursue returns in both rising and falling markets.
  • The pursuit of returns in both bull and bear markets is commonly referred to as seeking "absolute returns". Keep in mind that absolute return investments are not intended to outperform stocks and bonds during strong market rallies.
  • The returns of many alternative investments have historically shown little to no correlation to traditional stock and bond investments over the long term.
  • Non-correlated assets may reduce portfolio volatility during difficult market periods.

Goals of Alternatives

There are many potential benefits (and risks) that can be attained by introducing alternative investments into a portfolio. Despite the fact that various types of alternative investments can seem different from one another, many share common objectives. Click on the sections below to explore them further.

 

Portfolio Diversification

The bear markets of 2000–2002 and 2008 have reminded yet another generation of investors of the importance of diversification.

Looking to the institutional investing space — particularly university endowments — one can see how their approach to diversification has shifted over the last 10 years. According to an annual study conducted to monitor investment allocations of several hundred university endowments, from 2005 to 2014, the average endowment reduced their exposure to stocks from 59% to 36% and increased their allocations to alternative investments from 17% to 51%.

 

Endowments Have Sharply Increased The Use of Alternatives Over the last 10 Years

 Average University Endowment

Source: NACUBO Annual Endowment Study 2005, 2014

 

Further analyzing how these endowments allocate their portfolios, we see a significant difference versus a more traditional "moderate" portfolio of 60% stocks and 40% bonds. Endowments have as much as 53% of their portfolio committed to alternative investing strategies.

 

Seeking True Diversification

True Diversification | Alternatives

1. Source: NACUBO 2014 Common Fund Study of Endowments

 

Risk Mitigation

A peak-to-valley decline measures the worst price decline from a historical peak during a specified time frame.

Using month-end values from January 1990 through December 2018, the chart below measures the worst peak-to-valley declines and average annual returns for managed futures alongside several other major indices. Over the last 30 years, the largest peak-to-valley decline for managed futures compares favorably to the largest declines seen in domestic and international stocks, commodities and real estate.

Average Annual Returns and Worst Peak-to-Valley Declines
January 1990 – December 2018

Worst Peak-to-Valley Declines and Average Annual Return January 1990 – December 2018

 

As with any type of investment, alternatives can have risk. This includes risks associated with the use of leverage, short sales, options, futures, derivatives, emerging markets, illiquid securities and limited regulatory oversight. The Barclay Systematic Traders Index is a proxy for Managed Futures performance.

See Glossary of Terms for index definitions and risks.

©2020 Steben & Company, LLC. All rights reserved.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations. Investing in bonds involves certain risks such as market risk if sold prior to maturity and credit risk especially of investing in high yield bonds, which have lower ratings and are subject to greater volatility. All bond investments may be worth less than original costs upon redemption or maturity.  Alternative investments describe a spectrum of strategies that cannot be accessed through traditional stock and bond markets.  Investing in alternative investments is speculative, not suitable for all clients, and intended for sophisticated investors who are willing to bear the high economic risks of the investment.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RETURNS. THERE IS NO GUARANTEE THAT ANY INVESTMENT WILL ACHIEVE ITS OBJECTIVES, GENERATE PROFITS OR AVOID LOSSES.

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RISK CONSIDERATIONS: Managed futures and other alternative investments are not suitable for all investors. Their investment programs are speculative and performance can be volatile. An investor could lose all or a substantial amount of their investment. They involve a high degree of risk and often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. In addition, they can be highly illiquid; are not required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; may not be subject to the same regulatory requirements as mutual funds; and often charge high fees which may offset any trading profits. Diversification does not ensure a profit or guarantee against a loss. Alternative investment managers typically exercise broad investment discretion and may apply similar strategies across multiple investment vehicles, resulting in less diversification. Trading may occur outside the United States which may pose greater risks than trading on US exchanges and in US markets. 

Additionally, alternative investments often entail futures, forwards contracts and swaps trading, which involves substantial risk of loss and may be volatile. Other risks inherent in an investment in alternatives include short sales, options, derivatives, junk bonds, emerging markets and limited regulatory oversight.

There may not be a secondary market for an investor's interest in alternative investments, and none may develop. There may be restrictions on transferring interests in some types of alternative investments.

Please see our Education section for more information on alternative investments, their risks, and a Glossary of Terms.

This website is not an offer to sell, or a solicitation of any offer to buy an interest in any Steben Fund. Any such offer or solicitation of an investment may be made only by delivery of the Fund’s prospectus or confidential offering memorandum. This website is not complete and does not contain certain material information about the Steben Funds, including important disclosures and risk factors associated with an investment in the Funds.