One of the challenges facing today’s investors and financial advisors has to do with understanding the role of alternative investments within a portfolio.
To address this challenge, Swan Global Investments will provide a series of blog posts over the coming months to compare and analyze various types of alternative strategies and categories. We seek to answer the most important questions in each type of strategy, namely:
- What are the drivers of returns in each strategy?
- What are the risks in each strategy?
- What role does a given strategy play within a portfolio?
- How does the given strategy compare to the Defined Risk Strategy?
Making Space for Athletes on the Team
Every winter, college football fans around the nation eagerly await National Signing Day, when the nation’s top
prospects announce their initial commitment to a university. I’m always intrigued by those kids who aren’t recruited to play a specific position, but are simply listed as an “athlete.”
When it comes to judging the potential of a quarterback or defensive end, the analytical metrics used are pretty standardized and straightforward: speed, strength, body dimensions, etc. But with certain prospects, it’s hard to know just where they should fit on a team. Offense or defense? Every-down player or specialty situations? Everyone knows Christian McCaffrey or Jabrill Peppers will make a team better, but not everyone knows how to best utilize a multi-dimensional talent on a team.
These athletes are hard to classify, just as liquid alternatives are hard to classify.
Since the Financial Crisis of 2007-09 when most equity managers lost money in lock-step with the broad market, there has been an explosion of strategies whose only common thread or similarity is that they are “doing something different.”
The loose definition of alternative or liquid alt makes understanding or analyzing them very tricky. These strategies are unique and wide-ranging. In 2016, Morningstar expanded their liquid alternative framework by adding several new categories and creating an alternative style box to complement their work in traditional investments.