In a market environment of retreating stock prices, a flight to safety in fixed income sectors, and concerns about both the future course of the global economy and central bank policy, interest in alternative investments is likely to remain high.
Alternatives come in many varieties designed to address specific portfolio needs. To make sense of this variety, it is helpful to compare the long-term performance of alts with each other, and with traditional investments, to identify their characteristics.
Comparing performance We conducted a research study to gain a better understanding of how different alternative strategies may behave in different environments. We think this understanding is essential to utilizing alts as an effective source of diversification over market cycles.
In an earlier post, we outlined our approach to classifying alternatives by investment objective. Today we want to highlight the returns and volatility of the index proxies that we selected to represent the objectives.
This graph plots return and volatility data for the 20 years through the end of 2013.
These results can help us begin to shape expectations for investment performance from alternatives. Two of the objectives stand out on the extremes of the chart:
• The alternative Return Enhancer objective has nearly the highest volatility and the highest returns. • Traditional bonds have the lowest volatility and nearly the lowest returns.
Risk Reducer/Volatility Dampener merits attention The other three alternative objectives — Inflation Hedge, Risk Reducer/Volatility Dampener, and Zero Beta/Zero Correlation — fall in the middle. Each one has demonstrated lower volatility than stocks and higher volatility than bonds, while their returns varied. As the graph shows, the Risk Reducer/Volatility Dampener objective has one of the highest levels of return relative to its risk.
Of course, past performance is no guarantee of future performance, but the 20-year data hints at the diversification that a long-term position in alternatives might offer.
You can find additional insights in our research study, "Alternatives in Action."
Alternative investments may be subject to market risk, currency risk, foreign investment risks, liquidity risks, higher fees and expenses, regulatory restrictions, and volatility due to speculative trading and use of leverage.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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