Understanding Alternative Investments

Alternative investments had a rough year in 2014, leading many investors to shift their strategies away from the asset class.

Over the last quarter of a century, however, alternatives have enjoyed an enviable track record, providing better returns than stocks and bonds and with much less volatility than equities. Yet many investors remain wary.

Bob Rice, the alternative investment expert and commentator, helps clear up some of the misconceptions about the asset class — and discusses his latest book, The Alternative Answer — in a Take 15 interview with Jason Voss, CFA. Rice stresses the importance of alternative investments for portfolio managers, and how best to explain that importance to clients.

The most misunderstood thing about alternative investments? “The idea that they should always outperform the stock market,” Rice says. “Trying to have clients understand why it is that you might have them in strategies that don’t always outperform the Dow is a pretty useful thing.”

Rice also notes the benefits of outperforming the market on the downside. “The reason that hedge funds have outperformed the market over the last 20 years is pretty simple: They lose less on the downside,” he says. “What I try to emphasize to people is: You don’t need to beat the market on the upside, what you need to do is beat it on the downside.”

One of the other concepts Rice discusses is active alpha. “If you’re looking for alpha, the trick to me is to look for what I call ‘active alpha,‘” he says. “Not somebody who’s sitting back and passively picking this set of stocks versus that set of stocks.” Rather, Rice explains, active alpha is when “people are actually working to create value.”

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.