Home > Articles > Business & Management > Finance & Investing

The New Movement in Alternative Investing: What Goes Up...

  • Print
  • + Share This
A new movement is afoot—one focused on alternative investments that can alter the way people invest. Clifford Jack introduces his book, which explains the increased globalization and the hyper-connectivity of today’s markets, and the volatility all of it brings.
This chapter is from the book
  • Did you hear the Dow is going to 36,000?

At least that’s what James Glassman, former Washington Post columnist and Undersecretary of State to President George W. Bush, argued in his 1999 book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. Co-written with Kevin A. Hassett, the title hinted at a steep rise in the stock market within five years.1 The DowSM, of course, refers to the Dow Jones Industrial AverageSM , a market barometer that measures the price-weighted average of 30 actively traded blue chip stocks.2 As it turned out, the bull market Glassman and Hassett predicted ended up being a bubble that popped when the Dow hit 11,722.98 on January 14, 2000.3 “One of my colleagues...told me to never tie the Dow to a specific date,” Glassman said in an interview more than a decade later. “I wish I had gotten the advice sooner.”4

He was hardly alone. Consider similarly miscalculated statements made just before and during the economic downturn of 2008.

  • “I expect there will be some failures...I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”

    —Federal Reserve Chairman Ben Bernanke, February 20085

  • “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under...I think they are in good shape going forward.”

    —House Financial Services Committee Chairman Barney Frank (D-Mass.), July 20086

  • “I’m not an economist, but I do believe that we’re growing.”

    —President George W. Bush at a press conference, July 20087

So-called experts who try to predict market behavior seem to appear every time we find ourselves in the midst of an expansion or contraction we believe may never end. Some new innovation, global condition, political environment, or earth shattering event leads one to believe it’s different this time—only to find out later, it wasn’t.

In the wake of the global housing and market collapse of 2008, I’ve heard much the same—prepare for lower returns, global growth will be muted for the foreseeable future, economies will bump along the bottom, and recovery will be a long, slow slog. But while the benefit of hindsight makes it easy to scoff at predictions of market cycles past, is it truly different this time? I would say, yes and no.

Too many investors make the mistake of believing that each market boom or bust necessitates a complete change in investment strategy, but this is rarely the case. Rather, simple adjustments could help stabilize a portfolio. In fact, the theories of modern investing pioneer Harry Markowitz, whom I will discuss at length throughout this book, have been used for decades in all sorts of market climates. His frameworks are constant, they just require new inputs. Think of it this way: the science (framework) behind Ford’s Model-T doesn’t much differ from cars today. Fuel powers a combustion engine that causes four tires to rotate. But new efficiencies and features (variables) developed in recent decades mean cars can set out for destinations in all kinds of conditions and on all kinds of terrain.

To continue the metaphor, different investment strategies have been developed to help navigate any number of terrains. While there is always risk of losing money, access is available to strategies that have been designed specifically to help minimize (or maximize) the impact of the terrain, depending on one’s intention. For example, alternative investments, variable annuities, and hedge funds are all products that may help during a market shift. Each of these products will be defined at length in the chapters that follow, along with their potential risks. One of which, of course, is the loss of the investor’s money.

Here’s a little known fact about 2008. While the world was awash in economic chaos over fears that entire countries could go under, when the populace panicked, and almost every sector seemed to be down,8 several alternative and fixed income indices fared better than traditional equity indices. Focusing on alternative indices, while many alternative indices were down, several of these indices performed better than the overall market (as measured by the Russell 3000 Index).9 For this analysis, I examined the performance of 17 separate indices, including alternative indices, equity indices, and fixed income indices that I used as a proxy for asset classes. It is important to know that indices are not available for direct investment.

Although in existence for decades, the increasing interest and strategic use of alternative investments in this new economic environment is the catalyst for what I’ve termed “Generation Alt—The New Movement in Alternative Investing.”

Generation Buy and Hold, what I would call the prior cohort, carried the flag for years thanks to strong overall economic growth and steadily lowering interest rates. Unfortunately, very little of what happened then looks like the post-2008 markets of today. In fact, after the meltdown, investors in Generation Buy and Hold quickly became Generation Buy and Fold, exiting the market altogether to wait for signs of life—and some are still waiting. As of March 2013, investors were still sitting on $9.81 trillion in cash and cash equivalents (which comprised of money market mutual funds, money market deposit accounts, and small-denomination time deposits).10

Enter Generation Alt, a new era of investors who understand that time is money and that heading to the sidelines to escape volatility will not help to achieve their long-term goals. I think they need an investment strategy that helps them stay invested no matter how markets perform. Alternative investments may be one possibility to help investors do just that.

Defined as anything other than stocks, bonds, or cash that may increase or decrease independently of traditional securities (think hedge funds, managed futures, real estate, and commodities), alternative investments have the potential to help manage the dual problems of increasing correlation and lack of portfolio diversification.

Although far from a simple one-size-fits-all strategy, alternative investments can play a role in day-to-day investment portfolios by helping to provide diversification in an increasingly globalized and homogenized investment world. Even though they’ve existed for years, I believe alternative investments, combined with new philosophies, are positioned to be the next disruptive movement in the ongoing evolution of the investment management and financial services industries.

Disruption, in this context, is a term that refers to any idea that overturns convention, questions assumptions, and takes steps toward a new future.11 At first they seem of limited interest, but eventually their ideas catch on and can encourage new thinking. Look at how the advent of MP3 technology and iPods completely changed the way we listen to and purchase music. Not only did songs become available for download, but it also sparked a movement to other forms of digital content—movies, TV shows, and books. The status quo, at one point a boom box or Sony Walkman, was disrupted. While I am not suggesting that alternative investments are the iPod of alternative investing, they may become an unexpected disruption in financial services due to a need for more diversification in the face of increasingly correlated markets—something we will discuss at length. With increased accessibility and education, I believe that alternative investments, or alts, have the potential to help investors navigate market uncertainty.

At the core of this uncertainty is volatility, or the sharp rise and fall in price within a short-term period. What’s creating it? I could point to several things. The blurring of investment lines internationally means investors can now quickly react to political and economic events worldwide. I’ve witnessed the effects of technology on the speed of investing, and not always to the benefit of the investor. While technology can be liberating, it can also, in my mind, create problems that did not exist as recently as 20 years ago.

Things like flash trading, day trading, and frequency trading have had an impact on sound investment structures and contribute to the manic markets we now experience. I would argue that in our increasingly interconnected world, dampening volatility absolutely makes sense. In 2008, it became evident that alternative investments might well be the right strategy for this volatile environment. How so? In contrast to the overall market drop, university endowments, for example, fared better during the economic downturn. Their “secret” was their use of alternative investments. I don’t mean to imply that endowments had gains in 2008, I am only pointing out that endowments fared better. And it is important to remember that while alternatives and endowments do not always outperform the market (as we saw in 2012), they certainly fared better during the most recent downturn. Most recently, in the year ended June 2013, endowments did slightly decrease their allocation to alts to 47% of their portfolio and returns were an average of 11.7% in one year.12

Long available to qualified, high-net-worth investors, they were little known to average retail investors outside of Wall Street wirehouse firms and the aforementioned universities. In fact, average retail investors, those investing for their own benefit (retirement, their kid’s college, etc.), still do not have access to exactly the same investments as endowments—yet alternative investments are now attracting the attention of these smaller investors for a number of reasons, which I will discuss. But perhaps the biggest is the increase in recent years in market correlation and volatility, twin concepts that figure prominently in the relative success and failure of any investment portfolio.

Think of it this way: It took 76 years for the Dow Jones Industrial Average to close above 1,000 on November 14, 1972, less than half that time to rise 1,300% to its pre-crisis high of 14,000 on July 19, 2007,13 and just 18 months to lose more than half its value to close at 6,547.05 on March 9, 2009.14 Our increasingly interconnected world means that if current trends continue, this type of compression in reaching market milestones, and the volatility that drives it, will likely increase.15 While 100-point swings in daily market performance are not unheard of, today they’re far too common.16 The lack of volatility in an investment portfolio may be a way to measure financial “success,” however, individuals, couples, families, or even foundations may have different tolerances when it comes to volatility.

As baby boomers retire, they may have the greatest need to access the full universe of available investments. Should another crisis appear, they no longer have time to wait for a rebound before drawing on their financial resources for retirement. By understanding the benefits of investment strategies with low correlations to traditional markets, I believe investors have a good chance of hedging against the same problems experienced in 2008. Throughout the book, we will explore how alternative investments were developed. We’ll also look at the success they experienced in the past, how the investment market has changed, and discuss why alternatives may be worth considering.

Additionally, we’ll answer a number of important questions, including:

  • How are alternative investments defined and how do they differ from traditional investments?
  • What is meant by high and low correlation?
  • How did alternative investments develop and what benefits have certain investors realized from their use?
  • What are the different types of alternative investments and what role do they play in investing?
  • What situations involving alternative investments should be carefully considered?
  • What impact can alternatives have on volatility and performance over the long term?

As I mentioned, a new movement is afoot—one focused on alternative investments that can alter the way people invest. I call it Generation Alt . The concepts detailed in Generation Alt are specifically designed to explain the increased globalization and the hyper-connectivity of today’s markets, and the volatility all of it brings.

Let’s discuss...

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020