If you’re disappointed with your portfolio’s returns and are looking for other options, there are alternative investments. Literally.
So-called alternative investments are generally defined as anything that falls outside traditional stock and bond investments and whose role is to potentially zig when the broader markets zag. The goal is to mitigate portfolio volatility, hedge against downsides and boost portfolio returns in a way that is not tied directly to the stock market’s performance.
“Stock and bond returns will be strained for the next three to five years, so it makes sense to [consider] other sources of returns,” said certified financial planner Mark Wilson, chief investment officer for The Tarbox Group. “But be aware of what kind of risk you are adding to your portfolio.”
The stock market, as measured by the Standard & Poor’s 500 index, gained a meager 1.2 percent last year (including reinvested dividends). And so far this year, the S&P is in negative territory.
The bond market’s returns, meanwhile, have languished in the range of 1 percent to 2 percent for at least five years. And although the Fed raised its benchmark interest rate in December, returns on bonds won’t change much.
While risk is definitely involved with alternatives, not all are more risky than stocks. And some are more easily understood than others.
Wilson explained that, given how poorly the bond market is doing, his firm has moved fixed-income assets for some clients into other investments.
“We’re taking a risk, but we don’t expect [that risk] to be as high as the stock market,” he said.
One alternative his firm increasingly has been using is called an interval fund. These operate largely like traditional mutual funds but invest in less-liquid asset classes, such as reinsurance or various real estate opportunities. And there are only certain times you can buy into the fund or unload your shares (thus, the “interval” tag).
Wilson’s firm uses, for example, a reinsurance fund through Stone Ridge Asset Management, which generally offers such funds only to registered investment advisors.
“I’d be very careful of trying new strategies just because they’re new. If it doesn’t fit into the strategic framework of the … portfolio, it really doesn’t make much sense to do it.”
But, Wilson said, “I think this type of fund will become more widely available over time.”
Basically, reinsurance is insurance for insurance companies. Just like a person buys homeowner’s insurance so he or she isn’t bankrupted by a destroyed house, insurance companies buy insurance to protect themselves against being unable to cover claims in the event of a catastrophe. And even those reinsurers buy some kind of coverage.
In simple terms, reinsurance allows the risk to be spread out among insurers rather than borne by just one company. While there is no guarantee of a return, funds that invest in reinsurance are uncorrelated to the stock market.
And in the event of a catastrophe, such as a hurricane or tsunami, a complicated system of contracts among insurance companies allows huge claims resulting from a catastrophe to be absorbed by many insurers on a global scale.