Advertisement
Markets

Alternative Investments Offer Stability in a Rocky Market

Managers of these investments work hard to detach them from the direction of stocks and bonds

Maybe it takes a swooning stock market to focus the mind on alternative assets, a category that most people ignored over the past few years as share prices soared to new highs. But following the recent stock market plunge, alternatives, which have little to no correlation with the stock and bond markets, are looking more appealing.

Consider what occurred during the summer slump. Standard & Poor’s 500-stock index plunged 11% between August 10 and August 25. Over the same period, managed futures mutual funds, which use futures contracts to track trends in various markets, nearly broke even, on average. And market-neutral mutual funds—which seek to reduce risk by offsetting stock holdings with roughly equal positions in stocks that are sold short (a bet on falling prices)—lost just 1.2%, on average.

Advertisement - Article continues below

How much of your portfolio should you devote to alternatives? Chris Geczy, an adjunct professor of finance at the University of Pennsylvania’s Wharton School, suggests at least 10% of your assets, which should provide some cushion when the stock market tanks. With alternatives, “you may not make as much during a bull market in stocks, but you won’t see the same declines, either,” he says.

The mutual fund industry has produced a slew of alternative offerings in recent years. The category includes a hodgepodge of diverse strategies, so choosing the right one is key. Morgan Stanley says that multi-strategy alternative funds, managed futures funds and market-neutral stock funds make sense now.

Advertisement
Advertisement - Article continues below

In the first category is IQ Hedge Multi-Strategy Tracker ETF (symbol QAI), an exchange-traded fund that tracks an index of six alternative strategies. Altegris Futures Evolution Strategy N (EVONX), a mutual fund, combines managed futures with an actively managed bond portfolio. A rise in takeovers enhances the appeal of merger funds. They typically buy stock in a targeted firm after a deal is announced. We favor the aptly named Merger Fund (MERFX), a member of the Kiplinger 25. Finally, consider TFS Market Neutral (TFSMX), which invests mostly in small-company stocks, maintaining a market-neutral stance by holding an equal ratio of long and short positions.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020

Recommended

Closing Bell 7/10/20: Gilead Gives Stocks a Booster Shot
Markets

Closing Bell 7/10/20: Gilead Gives Stocks a Booster Shot

Stocks rallied out of negative territory Friday after Gilead announced that remdesivir helped reduce COVID-19 mortality risk in a clinical trial.
July 10, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 10, 2020
Closing Bell 7/9/20: Another Split Market as Jobs Concerns Grow
Markets

Closing Bell 7/9/20: Another Split Market as Jobs Concerns Grow

A mounting list of planned playoffs weighs on stocks Thursday, though Big Tech manages to hoist the Nasdaq up to another record high.
July 9, 2020
Closing Bell 7/8/20: Tech Stocks Lead Wall Street Forward Again
Markets

Closing Bell 7/8/20: Tech Stocks Lead Wall Street Forward Again

U.S coronavirus cases continue to spike, but Apple helped lead another Big Tech rally to drive the major indices higher Wednesday.
July 8, 2020