Alternative strategies for liquid assets
Alts as a third stream of modern portfolios opens up a truly vast investable universe for advisors to consider. However, Wilson argues that the contemporary market environment and the individual needs of retail investor clients should point advisors towards certain specific alternatives sectors. He calls out commodity exposures as a useful inflation hedge as well as market neutral and absolute return strategies to mute sensitivity to equity markets and GDP growth.
The goal in the latter category is to diversify risk away from equity themes while outperforming cash. That should result in a portfolio where returns remain additive but risks are not. Market neutral and absolute return strategies, Wilson notes, use alternative mechanisms like stock shorting to either amplify market return or mitigate market risk, offering a differentiated return stream from long equity positions.
Returns in those strategies, Wilson notes, tend to be driven more by manager skill than by broader market performance. They are also largely derived from equities, making them taxable as capital gains rather than interest income. Wilson emphasizes how useful that can be for higher net worth investors with low risk tolerances, who need income but prioritize tax-efficiency.
One of the most important advantages of strategies like market neutral or absolute return is that they tend to come with the same liquidity as most public securities. For retail investors, who don’t have the capacity for illiquidity required by some private asset and real estate investments, that can be a significant advantage.
Assessing management quality
The rise of these kinds of highly active, manager-driven strategies fits into how Wilson sees investment dollars flowing. Over the past 20 years, he says, a significant net flow of investor assets has moved away from actively managed long strategies into two buckets: passive funds and alternatives. The alternatives side, he says, offers a ‘barbell’ contrast to low-cost passive funds that can deliver long exposures.