Part 3 of our "summer school" series on alternatives
By Walter Davis, Alternatives Investment Strategist. Posted on Expert Investment Views: Invesco US Blog.
In this chapter of my "summer school" blog series, I take a look at what investors might expect from alternative investment performance. (Part 1 reviewed what alternative investments are, and Part 2 explained why investors should consider adding them to portfolios.)
Historical performance of alternatives
In my last blog, I used the first chart1 below to compare the historical performance of alternatives to that of equities, fixed income and the traditional 60% stock/40% bond portfolio.
This chart does a good job comparing the long-term returns and key risk measures of alternatives to those of traditional investments. But as we all know, there can be shorter-term performance trends - both good and bad - within long-term time frames. In this blog, we're going to dig a bit deeper into how alternatives performed in different equity market environments. As we'll see in the chart below,1 the performance of alternatives has differed considerably from equities during different parts of the market cycle.
When comparing the performance of alternatives to stocks during different parts of the market cycle, it becomes clear that there is a tortoise and hare relationship between the two.
- During bull markets, alternatives have historically generated positive returns, but those returns have lagged those of stocks.
- During bear markets, alternatives have historically generated superior returns relative to stocks. For example, during the two-year bear market following the bursting of the tech bubble, alternatives generated a positive return. During the global financial crisis, alternatives posted a negative return, but didn't lose as much as stocks did.
Returning to the tortoise and hare analogy, alternatives have behaved like the tortoise, taking a slow and steady approach by generating more consistent returns with less volatility than stocks. On the other hand, stocks are more like the hare - they may generate significant returns quickly, but they can also move sharply downward in a very short period. Only when examining the entire market cycle did the returns for equities and alternatives end up in a similar place.
For investors considering alternatives, it is critical that they understand the potential nature of returns during different parts of the market cycle. Specifically, they might expect alternatives to underperform equities during periods of stock market strength, outperform equities during periods of stock market weakness, and generate equity-like returns in the long term.
To learn more about Invesco and our alternative investment options, please visit our website at www.invesco.com/alternatives.
Blog header image: Matej Kastelic/Shutterstock.com
1 Source: StyleAdvisor. Alternatives are represented by a portfolio comprising equal allocations to alternative assets, represented by FTSE NAREIT All Equity REIT Index, Bloomberg Commodity Index; relative value strategies, represented by BarclayHedge Equity Market Neutral Index; global investing and trading strategies, represented by BarclayHedge Global Macro Index, BarclayHedge Multi Strategy Index and BarclayHedge Currency Traders Index; alternative equity strategies, represented by BarclayHedge Long/Short Index; and alternative fixed income strategies, represented by Credit Suisse Leveraged Loan Index, HFN Fixed Income Arbitrage Index and BarclayHedge Fixed Income Arbitrage Index. The performance of individual alternative investments will differ from that of the index. Equities represented by the S&P 500 Index. Fixed Income represented by the Bloomberg Barclays U.S. Aggregate Bond Index. Traditional 60/40 Portfolio represented by 60% S&P 500 & 40% Bloomberg Barclays U.S. Aggregate Bond Index. The period represented is January 1997 through December 2016. Volatility is measured by standard deviation.
For purposes of this analysis, only the performance of liquid alternatives is included. The reason for this is that liquid alternatives are widely available to all investor types. In contrast, illiquid alternatives (e.g. private equity, venture capital, direct real estate, etc.) are only available to high net worth and institutional investors and are not available to retail investors.
BarclayHedge indexes reflect performance of hedge funds, not of retail investment strategies, and are used for illustrative purposes only solely as points of reference in evaluating alternative investment strategies.
The BarclayHedge Currency Traders Index is an equal-weighted composite of managed programs that trade currency futures and/or cash forwards in the interbank market.
The BarclayHedge Equity Market Neutral Index includes funds that attempt to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country.
The BarclayHedge Fixed Income Arbitrage Index includes funds that aim to profit from price anomalies between related interest rate securities.
The BarclayHedge Global Macro Index includes funds that carry long and short positions in any of the world's major capital or derivative markets.
The BarclayHedge Long/Short Index includes funds that employ a directional strategy involving equity-oriented investing on both the long and short sides of the market.
The BarclayHedge Multi-Strategy Index includes funds that are characterized by their ability to dynamically allocate capital among strategies falling within several traditional hedge fund disciplines.
The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.
The Bloomberg Commodity Index is a broadly diversified commodity price index.
The Credit Suisse Leveraged Loan Index represents tradable, senior-secured, US dollar-denominated, noninvestment-grade loans.
The FTSE NAREIT All Equity REIT Index is an unmanaged index considered representative of US REITs.
The HFN Fixed Income Arbitrage Index includes funds that attempt to exploit pricing inefficiencies between credit sensitive instruments which may include government or corporate debt, structured securities and their related derivatives.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
Past performance is not a guarantee of future results. An investment cannot be made directly in an index.
Alternative investments can be less liquid and more volatile than traditional investments, such as stocks and bonds, and often lack longer-term track records.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
Investing in stock involves risks, including the loss of principal and changes in dividend policies of companies and the capital resources available for dividend payments. Although bonds generally present less short-term risk and volatility than stocks, investing in bonds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bonds also entail credit risk and the risk of default, as well as greater inflation risk than stocks.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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Invesco Distributors, Inc. is the US distributor for Invesco Ltd.'s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. PowerShares® is a registered trademark of Invesco Ltd., used by the investment adviser, Invesco PowerShares Capital Management LLC (PowerShares) under license. PowerShares and Invesco Distributors, Inc., ETF distributor, are indirect, wholly owned subsidiaries of Invesco Ltd.
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How have alternatives performed? by Invesco US