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The Future Goes to the Alternatives


After the recent massive meltdown, it's no surprise that 81% of registered investment advisory firms and 79% of brokers and advisers now believe that traditional asset allocation relying on stocks, bonds and cash provides insufficient portfolio diversification.

In a survey released Wednesday by Rydex/SGI, a majority of respondents used alternatives or were interested in them for portfolio diversification. The Rydex survey, conducted in November and December, polled 291 professionals-including RIAs and advisers from independent and wirehouse shops.

RIAs seemed somewhat more informed and interested in alternatives than broker/dealer reps. Leo Marzen, a wealth manager at Bridgewater Advisors in New York, said that might be because RIAs have open architecture and are out looking for the best client options.

All RIAs and 86% of brokers were interested in learning more about alternative investments, and a quarter of brokers and RIAs have 11% to 25% of their clients invested in alternatives. Currently, the three most commonly used alternative strategies are real estate, commodities and absolute return.

"This year will be one of explosive growth in alternative assets," predicted Richard M. Goldman, chief executive officer of Rydex/SGI. Last year saw a 65% increase in alternative mutual funds and ETFs, which now hold assets of $90 billion.

Rydex/SGI has made many of these strategies, once exclusive to institutions, available to advisers and retail investors. Funds like long/short commodities or managed futures are not only uncorrelated with stocks and bonds, but as mutual funds, they are liquid and transparent.

"In periods of crisis, equities don't give you diversification," said Bridgewater's Marzen. "And bond owners were spoiled by 30 years of dropping interest rates. Now that will change."

Marzen added that alternative investment strategies are a way to truly diversify and hedge risk-managed futures, for example, were up 8% during 2008-as well as a way for advisers to play market trends such as volatility; managed futures are long volatility. He recommended the Rydex/SGI website, getalt.com as a user-friendly way for advisers and their clients to get educated about alternatives.

Where is Rydex/SGI headed with alternatives? Straight "equity and bond funds-that game is over," Goldman said. In the future, he said, alternatives will be sprinkled throughout the portfolrather than relegated to a 10% to 30% "alternative" slice of the pie.

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