WTOP Interview: Should You Invest in Alternative Investments
Shawn Anderson: Stocks, bonds, mutual funds. They’re fairly common investment choices, especially if you’re saving in a retirement account. There is another group though, known as alternative investments that’s not very well known, but may be worth considering.
Hilary Howard: Joining us live, Nina Mitchell, co-founder of Her Wealth and Principal at the Colony Group. Great to see you Nina!
Nina Mitchell: Thank you, happy to be here.
Hillary: So, what are alternative investments and why don’t most of us know about them?
Nina: Well, for many investors, there’s a certain mystique around alternative investments because we immediately think of hedge funds or private deals that are only available to institutional investors. And it’s really been over the last few years that we can even have access to alternatives through mutual funds an ETFs. So, what are alternative vestments these are investments? These are investments that are meant to complement your traditional stocks, bonds, and cash. And in my article, I organized them in 4 general buckets:
- First, is real assets, which include real estate, infrastructure and commodities that tend to provide a hedge against inflation.
- Second, is private equity which is investing in private companies in exchange for a future higher pay-outs.
- Third, are hedge funds which invest in a variety of sophisticated hedging strategies that typically use options to protect the downside against falling stock or bond prices and also capitalize on mergers and other events.
- And the fourth bucket, is other which kind of includes the newer strategies like alternative lending funds and insurance link securities.
Shawn: Why would we consider investing in alternatives?
Nina: That’s a great question. You know, many investors are becoming more concerned about the stock market’s ability to reach new highs as well as just the rising interest rates, which is a challenge for bond investors. So, alternative investments help diversify your portfolio with return and risk drivers that are less dependent on the direction of the stock and bond markets. And that helps reduce the risk to your portfolio. So, for example a classic hedging strategy is called long short equity and that’s when a manager buy stocks they expect to increase in value and sell short stocks they expect to decrease in value. And I’m not going to get into the mechanics of selling short, but you make money basically when stocks go down and as a group a lot of the long short equity managers tend to track and index, their equity index at about 50-70% to on the upside and they fall 30-40% percent less on the downside.
So, just case in point, in 2008 when the S&P was down 38%, the average long-short equity manager was down 25%. And then last year we had a great year in the market, the S&P was up 21%, and the average long short equity fund was up around 12%. And I like to use like a driver analogy when it comes to adding hedging and alternative strategies, just like drivers need to know different routes to navigate around road blocks. Investors can use these alternative strategies to provide a smoother ride with less potholes.
Hillary: So quickly before we go. How do we do this if we’re interested?
Nina: Well, investors can invest in the same hedging strategies through mutual funds and exchange traded funds and in those funds provide daily liquidity as well as active management. And I would just say that you know, alternative strategies really do need to be reviewed carefully and ideally with the help of an investment advisor because they are complex and the results and risks can vary greatly, based on the manager’s skill and the strategy.
Shawn: Alright, Nina thanks much. Nina Mitchell with the Colony Group. Read more wtop.com, search Her Wealth.