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By Christine Benz | 02-23-2012 03:00 PM

2008 Turns Investors Toward Alternatives

Morningstar's Christine Benz and vice president of research John Rekenthaler discuss the definition and proliferation of 'alternative' investment products and the role they may play in investors' portfolios.

Christine Benz: Hi, I'm Christine Benz for Morningstar. I'm here at the Morningstar Ibbotson Conference. I recently had the opportunity to sit down with John Rekenthaler. He is vice president of research for Morningstar. We discussed the proliferation of alternative investment products, what exactly constitutes an alternative, and what role, if any, these securities should have in investor portfolios.

John, thank you so much for being here.

John Rekenthaler: Pleasure being here, Christine.

Benz: John, there has been so much discussion about alternatives, so many alternatives products rolled out over the past several years, and I know that you keep an eye on that asset class and a team of analysts at Morningstar covers that asset class.

First, I'd like you to broadly define what is kind of an amorphous group. What constitutes an alternative investment?

Rekenthaler: I'm glad you asked, because there really is not consensus on this, so it's a term that tends to get thrown around a lot, and people are not always communicating with each other. It has different meanings. 

We can start by differentiating between alternative strategies. So, an alternative strategy would be something like a long-short fund or maybe option writing strategies where you own securities and write options or manage futures. And then there is an alternative asset, say owning a commodity, owning oil futures or something like that.

So, you've got alternative strategies that are, broadly speaking, often what we think of when we think of hedge fund strategies or hedging strategies, and then exposure to alternative assets. They are both called "alternatives," but they are quite different. All they have in common is, well, I'm alternative.

Benz: They are not stocks; they are not bonds?

Rekenthaler: They are alternatives. But ... really what we have is, we have stocks, we have bonds, we have hedging-type investment strategies, and then we have other stuff, which is exposure to strange and different and smaller--they are not always smaller, like oil--but certainly different asset classes than we're used to.

So, really I think breaking alternatives down with those strategies versus assets, but even within there, there's still differences within each of those fields as well.

Benz: So, the unifying theme, though, the idea is to diversify away from those traditional asset classes that have long formed the core of most investors' portfolios?

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