How HSC Leverages Alternative Investments in Your Best Interests
Written by Joe Eskridge
In our low-growth economic environment, you may be wondering what HSC Wealth Advisors’ position is on alternative investments (i.e., so called, “alts”). Alts, which include real estate and commodities, can have low correlation to stocks and bonds.
HSC Wealth Advisors includes alts in portfolios to smooth returns and hedge against poor performance in more traditional investments. For example, we use real estate investment trusts (REITs) mutual funds and exchange traded funds (ETFs). Newer alts within the world of mutual funds and ETFs include non-traditional bonds and we’ve used Mainstay, Blackrock and Wells Fargo non-traditional bond funds in portfolios since the last quarter of 2013.
Other alts come in many forms, such as “bear market” strategies that bet against the market at all times; long/short equity strategies that involve buying long equities that are expected to increase in value and selling short equities that are expected to decrease in value (i.e., these strategies bet for and against stocks at the same time); managed futures strategies that are designed to capitalize on momentum; market neutral strategies that are expressly designed to minimize exposure to beta; multi-currency strategies, and multi-alternative strategies that take an absolute return approach or strive to achieve set return and/or volatility targets.
Until fairly recently, these alts were only available to institutions, endowments and wealthy individuals who were qualified to invest in them. What do I mean by “wealthy individuals”? I am writing about “accredited investors” and “qualified purchasers”, which are the two basic categories of private investors. Accredited investors need a net worth of more than $1 million and an individual income of $200,000 or a joint income of $300,000. Qualified purchasers need to have $5 million in investments not including a primary residence or any property used for a business. Keep in mind that the typical minimum hedge fund investment is between $500,000 and $1 million and most of the big successful funds have a much higher minimum initial investment.
However, in the past few years, mutual fund managers figured out how to package these strategies in a way that allows access to everyone. But just because you can buy alts doesn’t mean you should buy alts. After all, you have the right-of-way as a pedestrian but even so you never want to be “dead” right; thus, you take caution when crossing the street.
HSC Wealth Advisors exercises caution every time Joel and I evaluate alts. In our experience we have found that alts tend to be very lucrative for everyone in the value chain but the client. Therefore, we scrutinize our investments, using Morningstar and fi360 for example, to ensure that the alts we use are in your best interests always.
First, we use our tools to discern the appropriate managers. Then, we incorporate those managers in our model portfolios to analyze performance. We recently completed our evaluation of the other alts listed above and the trend continues. In all cases, when alts other than REITs and non-traditional bond funds are included in our model portfolios:
-Performance does not change materially;
-Average weighted gross expense ratios increase (i.e., your investment fees increase) and
-As measured by the Sharpe ratio, risk-adjusted performance suffers. This means that these alts added volatility but no meaningful increase in return.
Our disciplined approach to asset allocation and diversification serves you well. We continue to monitor your portfolios for rebalancing opportunities, as well as strategic and tactical moves, as your objectives change and your goals come to exciting fruition. Thus, the bottom line and HSC Wealth Advisors’ position on alts is that we will continue to use REIT and non-traditional bond mutual funds and ETFs and proactively evaluate opportunities to add other alts. We are grateful for our relationship with you and for the trust that you place in HSC Wealth Advisors.