The financial textbooks tell us we should build well diversified portfolios with investments from a broad range of asset classes. The idea being that lower correlated (when one goes up the other goes down) investments can help smooth out portfolio returns over time. With this in mind, we began adding alternative investments to portfolios over a decade ago. We define alternatives as any investment that does not fit in the traditional stock and bond categories. Examples include commodities, MLP’s, Real Estate and Infrastructure, as well as hedged strategies that can go long and short a market.
Historically we have targeted less than 10% in alternative strategies. At the start of 2022, both stocks and bonds were looking vulnerable to rising rates. We moved our asset allocation targets to above 15% for alternatives in most portfolios. In hindsight we should have done more as stocks and bonds were hammered in the rising rate environment. While not all alternative strategies worked in 2022, commodities and hedged strategies both performed well in 2022. Our four most widely held alternative strategies in the Trust department:
• DWS RREEF Real Asset Fund – Invests in a mix of real estate, infrastructure, MLP’s, commodities, and inflation protected securities.
• First Trust Long/Short Equity Fund – Invests in a long/short strategy designed to capture most of the market upside with little market downside.
• Merger Fund – Designed to have bond like returns without interest rate risk by investing in merger arbitrage strategy.
• Loomis Sales Strategic Alpha Fund – Invests in a hedged fixed income strategy.
Historically we have targeted less than 10% in alternative strategies. At the start of 2022, both stocks and bonds were looking vulnerable to rising rates. We moved our asset allocation targets to above 15% for alternatives in most portfolios. In hindsight we should have done more as stocks and bonds were hammered in the rising rate environment. While not all alternative strategies worked in 2022, commodities and hedged strategies both performed well in 2022. Our four most widely held alternative strategies in the Trust department:
• DWS RREEF Real Asset Fund – Invests in a mix of real estate, infrastructure, MLP’s, commodities, and inflation protected securities.
• First Trust Long/Short Equity Fund – Invests in a long/short strategy designed to capture most of the market upside with little market downside.
• Merger Fund – Designed to have bond like returns without interest rate risk by investing in merger arbitrage strategy.
• Loomis Sales Strategic Alpha Fund – Invests in a hedged fixed income strategy.
The results for the above funds were not all positive in 2022, but they did outperform their stock and bond counterparts and therefore added some downside protection in a challenging year. As we start 2023, stock and bond valuations have improved and we are now dialing back our alternative exposure. In short, they did their job last year and now we are giving them a little break by moving our targets back below 10% for this year.
