01.22.2015

Wealth Managers Explore Alternatives

01.22.2015
Terry Flanagan

With volatility on the upswing and interest rates at rock bottom, wealth managers are becoming more receptive to alternative investment strategies, particularly in fixed income.

One such strategy is a bond overlay strategy which allows investors to invest in traditional treasury bonds and corporate bonds, while deploying a hedging strategy to eliminate or reduce interest-rate risk.

“We’ve been using that as one of our core strategies,” said Jeff Sica, chief investment officer and CEO of Circle Squared Alternative Investments, which provides consulting to wealth management professionals. “One of the things we do right out of the gate is we go in and say, ‘What type of bond do you own?’ If it’s real short duration, then you’re making no interest. If it’s real long duration, then you have incredible interest rate risk. Let’s use the bond overlay to strip out some of the interest rate risk and see if we can get better yield.”

Most advisors adhere to the tenets of modern portfolio theory, which advocates allocating fixed percentages to equities and fixed income. But Sica noted that doesn’t take into account the elevated correlations that can occur during highly stressful events such as occurred during the financial crisis.

“A lot of what we’ve been focused on is communicating to advisors the rationale behind why it’s important to reduce correlation in these volatile times,” he said. “Our strategy of choice is alternative investments.”

Following a mostly dormant 2014, the S&P 500 has posted an average move of 0.85 percent each day in 2015, compared with a daily price change of 0.53 percent in 2014.

Circle Squared offers a platform which gives access to its individual strategies. It also has a turnkey asset management platform that allows investors to create a portfolio giving them access to alternative investments. The suite of investment products includes real estate, private equity, private credit, natural resources, private placement offerings, entertainment and media.

According to Sica, fewer than 5% of advisors recommend alternative strategies, and of those alternative strategies being recommended, a significant percentage aren’t ‘marquee’ strategies.

“Advisors have been sticking with their traditional investments for the time being because they had a free ride in the S&P, but with the markets being more volatile, advisors are more open to using alternative strategies,” he said. “We’ve are providing strategies and analytics to support them in making these changes.”

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