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.
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
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
1. Source: NACUBO 2014 Common Fund Study of Endowments
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
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.