Thanks OP, good article.
I think it's quite interesting how ETFs have democratized access to different types of strategies, at a relatively cheap cost compared to before.
Years ago retail investors could not access these unless you had a lot of money. For many people they were simply off the table. And if you could access them (e.g. invest in a hedge fund), the fees were high.
The whole thesis to me is that stocks & bonds alone cannot be enough in a portfolio as there are periods of market environments where they can become correlated and decline at the same time e.g.
a) low growth + high inflation expectation ("stagflation") = stocks under-perform due to low growth and higher discount rates, and held bonds underperform due to high inflation expectation causing higher interest rates,
or
b) being in a ZIRP era and entering a period of high inflation expectations = higher interest rates -> higher discount rates which affects NPV of companies (so equity value fundamentally is lower), and return-to-risk being more appealing in new treasuries due to the higher yield. Causing capital to flow from stocks into new treasuries
So there is a case to make, that if you are investing with a multi-decade horizon, to add assets that can perform when this happens, so that your portfolio is protected for different market environments.
You could do this by adding assets with low correlation or anti-correlation to both stocks & bonds.
That's my goal (to me) for Alternates, and I like Larry's ideas.
I've been looking into gold (yes we get laughed at these days), but also other alternates that are now accessible to retail via ETFs that were previously only in the domain of hedge funds like managed futures, and also equity long-short.
Adding such assets will lower the volatility of the portfolio, but if you are giving up equity space to do so - then the returns also come down (since equities have high returns, although higher volatility).
So ideally you get to your desired return-to-risk by adding these assets at the expense of equity allocation, and then lever it up a bit since leverage will scale that ratio linearly (although there will be some drag from the cost of the leverage e.g. expense ratios, funding costs etc).
Anyone trying to do the same?
I think it's quite interesting how ETFs have democratized access to different types of strategies, at a relatively cheap cost compared to before.
Years ago retail investors could not access these unless you had a lot of money. For many people they were simply off the table. And if you could access them (e.g. invest in a hedge fund), the fees were high.
The whole thesis to me is that stocks & bonds alone cannot be enough in a portfolio as there are periods of market environments where they can become correlated and decline at the same time e.g.
a) low growth + high inflation expectation ("stagflation") = stocks under-perform due to low growth and higher discount rates, and held bonds underperform due to high inflation expectation causing higher interest rates,
or
b) being in a ZIRP era and entering a period of high inflation expectations = higher interest rates -> higher discount rates which affects NPV of companies (so equity value fundamentally is lower), and return-to-risk being more appealing in new treasuries due to the higher yield. Causing capital to flow from stocks into new treasuries
So there is a case to make, that if you are investing with a multi-decade horizon, to add assets that can perform when this happens, so that your portfolio is protected for different market environments.
You could do this by adding assets with low correlation or anti-correlation to both stocks & bonds.
That's my goal (to me) for Alternates, and I like Larry's ideas.
I've been looking into gold (yes we get laughed at these days), but also other alternates that are now accessible to retail via ETFs that were previously only in the domain of hedge funds like managed futures, and also equity long-short.
Adding such assets will lower the volatility of the portfolio, but if you are giving up equity space to do so - then the returns also come down (since equities have high returns, although higher volatility).
So ideally you get to your desired return-to-risk by adding these assets at the expense of equity allocation, and then lever it up a bit since leverage will scale that ratio linearly (although there will be some drag from the cost of the leverage e.g. expense ratios, funding costs etc).
Anyone trying to do the same?
This article is from Morningstar authored by Larry recently. He argues for significant exposures to a wide range of non-traditional alternate investments. These alternates now comprise more than half of his ideal portfolio. His enthusiasm for traditional equity/bond approaches seems to have diminished. He points out that institutional and endowment investors are also increasing alternate exposures at the expense of equity and bonds.
Comments?
Garland Whizzer
Statistics: Posted by cawrlkxn — Fri Sep 20, 2024 12:05 am — Replies 13 — Views 681