Commentary-Alternative Investments-Print

CASH FLOW MANAGEMENT

ECONOMIC & MARKET INSIGHTS

Why Alternative Investments Should Still Play a Role In Your Portfolio By Cindy Rapponotti

What is an “alternative investment?” Some investors may hear the term from time to time and simply think of it as an exotic type of security available only to the very wealthy. However, you may be more familiar with alternative investments than you realize. Real Estate Investment Trusts or REITs, Hedge Funds, Infrastructure/ Energy Master Limited Partnerships or MLPs, and Commodities are all considered “alternative” investments when compared to traditional investments such as stocks, bonds and money market funds. Since the economic and market recovery that began in 2009, Hedge Funds and other alternative investments in general have not kept up with equity and fixed income returns. Even the last five years have been disappointing as a 60% S&P 500/40% Bloomberg Barclays Aggregate Bond portfolio returned 9.64% versus the Hedge Fund HFRI FOF Conservative Index return of 3.68% (returns are annualized) Despite the recent challenges, we still believe that Hedge Funds and other alternative funds have a place in portfolios as market conditions change and the appetite for risk declines. Alternative investments remain attractive as they can help you reduce risk by diversifying your portfolio. In fact, many consider them an insurance policy in their portfolios as alternative investments often zig when the market zags due to lower correlations, by design, to the traditional asset classes of stocks and bonds. The range of choices in the alternative investments asset class have return and risk profiles that vary from high return/high risk to low return/low risk. For example, REITs and MLPs have high return/high risk profiles as they are a subset of the U.S. Equity market. They have features that may be attractive during different economic cycles or inflationary period, or may offer higher income or dividend distributions than traditional stocks or bonds. We have a positive outlook on the energy MLP sector despite its lagging performance in 2017. (MLPs are partnerships traded on major U.S. securities exchanges.) We believe an eventual ramp up in crude and natural gas volumes should lead to production recovery, drive strong operating leverage and increase cash flow. Ultimately, however, the performance of this sector will likely be driven by the direction of oil prices. If oil prices retreat toward $40 per barrel, energy MLPs will underperform. Rising interest rates could also be a headwind. Potential tax reform could have an impact but the likelihood of significant tax reform getting passed has diminished. Hedge Funds have a slightly different wrinkle compared to REITs or MLPs.

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