Alternative investments have gained in popularity among investors over the last several years. Used appropriately, they can be very useful in managing portfolio risk. Alternatives can also be used to meet other key investment objectives, such as inflation protection and income generation.

There are literally hundreds of funds that embrace alternative hedge fund-like strategies. Due diligence is more important than ever in the alternatives universe. If you’re going to invest in alternatives, you’ll need to weed out the poorer options and monitor your choices closely, post-investment.

So what exactly are alternative investments? Broadly speaking, alternatives are investments in assets other than stocks, bonds and cash. Alternative fund managers also utilize strategies that go beyond traditional ways of investing, such as long/short, arbitrage or absolute return strategies. Alternatives tend to behave differently than typical stock and bond investments. That’s why adding them to a portfolio may provide broader diversification, reduce risk, and enhance returns.

With the election of Donald Trump as president, we think hedge fund-like alternative investments, especially Long/Short equity funds, should perform well. Long/Short fund managers buy stocks they think are going to go up in price, while simultaneously trying to sell short stocks they think are going to go down in price. So, if they are successful in their execution of this strategy, fund managers can generate significant returns for investors. 

It's been a difficult environment for Long/Short fund managers over the last several years. Stocks have been positively correlated, meaning, they’ve all been pretty much moving in the same direction - together. Along with this, volatility has been fairly muted. It all may be about to change, which will favor the Long/Short Alternatives space going forward.

A Trump administration will likely cause more volatility in the marketplace. Although the stock market has been very positive on Trump so far, there's still significant risk associated with him. There's always a possibility that he might make a policy error or do something else that may cause the markets to react negatively and volatility to spike.  Different sectors of the stock market are already reacting to Trump's public comments and executive orders. We're seeing that certain companies and certain industries have been benefitting, more so than others.

So, the bottom line is that we think stock correlations are going lower and volatility is headed higher, which should make it easier for Long/Short fund managers to generate stronger returns. 

Investors have been turning to alternatives to diversify and improve the overall risk-return characteristics of their portfolios as well as meet other critical investment goals, such as inflation protection and income generation, all with low or no correlation to the capital markets. Now may be the time to add them to your portfolio.

George Kiraly Jr., CFP®, MBA is a NAPFA-Registered Financial Advisor.

Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group, and/or its clients may hold positions in the ETFs, mutual funds and/or any investment asset mentioned above. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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