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Time for High-Net-Worth Advisors to Expand to Alternative ETFs

Joanne Hill of ProShares Advisors says it’s time for high net worth advisors to expand their ETF menus to alternatives.

Nadia Papagiannis, 10/04/2012

Joanne Hill, head of investment strategy for ProShares Advisors, knows what advisors are thinking. How is one supposed to navigate a market that acts like the weather--periods of sunshine interrupted by raging storms? The answer came out in Hill's "Alternative ETF Toolkit" discussion at Morningstar's 2012 ETF Invest Conference: alternative investments.

Having started her financial career in the late 1970s, Hill is no stranger to volatility and uncertainty. To help advisors invest in our current market, she draws upon her experience with endowments and pensions. Endowments have been investing in alternatives since the 1970s, when the prospects for the equity markets seemed grim. And pensions started allocating to alternative investments post the 2000-02 crisis, when a bond rally created a large mismatch between pensions' assets and liabilities. It took a while for these institutions to become comfortable with alternatives. But now the average endowment of more than $1 billion in assets invests 60% of its assets in alternatives, and the average pension has double-digit allocations.

Of course, high-net-worth advisors are different than pensions and endowments. Their clients do not have infinite time horizons, and they need liquidity and the comfort of transparency. So what do we mean by alternatives, and what exactly are an advisor's alternatives? Alternative investments are most easily described by what they are not: standard stock and bond asset classes and standard long-only strategies. In exchange-traded products (which are both liquid and transparent) the options are surprisingly numerous. 

An Ever-Expanding Menu
First, we have alternative-asset-class exchange-traded products. Asset classes which hedge inflation include Treasury Inflation-Protected Securities and commodities (found in the IQ Real Return CPI or the ProShares 30 Year TIPS/TSY Spread RINF, for example) or U.S. dollar depreciation (Powershares DB US Dollar Index Bearish UDN).

Next, we have alternative strategies, which hopefully zig when clients' portfolios zag. Hedged fund replicator strategies such as HDG or QAI replicate broad hedge fund indexes, which are supposed to deliver positive returns over time with a relatively low correlation to stocks and bonds. Strategies such as RALS (ProShares RAFI Long/Short) or any of the QuantShares products (US Market Neutral Anti-Beta BTAL, for example) hedge out broad equity market risk in order to gain exposure to certain types of alpha. There are even managed-futures strategies in ETFs (the WisdomTree Managed Futures Strategy Fund WDTI, for example).

Finally, we have inverse-asset-class products. These products give investors negative or short exposure (sometimes leveraged short exposure) to both stocks and bonds, which investors can use tactically. Volatility or VIX index-based products would fall in this category (iPath, ProShares, VelocityShares, and ETRACS all offer VIX-related exchange-traded funds and notes) and so would short-bond products (the ProShares UltraShort 20+ Year Treasury ETF).

The list of alternatives is still growing. Advisors who haven't started investing in alternatives needn't feel bad; after all, it took the institutions decades to embrace them wholeheartedly. But it's time to start looking at a broader menu of tools that will diversify and protect your clients' portfolios from periods of bad weather.  

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