Alternatives: How They Became the Force They Are Today By Eric Crittenden

Despite a decades-long search for diversification, portfolio balance remains elusive to many modern investors. Even equity yields are less attractive, and today’s hottest trend is countries buying their own debt.

Yet, research shows that alternative investments can help investors find portfolio balance. And there are more strategies available than ever.

History shows that we may be on cusp of the next wave of modern portfolio diversification.

Let’s take a look back…

1917: Bonds

The ancestor of U.S. Treasuries, the Liberty Bond, is born.

1952: Portfolio Theory

Harry Markowitz devises the modern portfolio theory, a mixture of stocks and bonds.

1980s: 60/40 Grows

Baby boomers popularize the 60/40 portfolio as 1970s stagflation wanes and low-inflation growth emerges.


A second way to add portfolio diversification enters the marketplace: alternative investments. High net worth investors and university endowments access these new diversifiers through limited partnerships.

1995: Costs Rise

Funds of funds make alternatives more accessible and more expensive. The usual 1% management fee climbs to 2%, not including the standard 20% performance fee.

2003: Tech Bust

The dot com bubble bursts, driving some visionary retail investors to alternatives. But most investors keep their traditional 60/40 split.

2007: Housing Bust

U.S. Treasuries still provide worthwhile diversification during the housing market crash and the start of the credit crisis.

2009: Treasuries Bust

As interest rates hit near zero, U.S. Treasuries lose their edge as effective portfolio diversifiers. Risk-on, risk-off environments form as correlations between stocks and bonds begin to increase.

2010: Yields Bust

The Federal Reserve becomes the largest holder of U.S. Treasuries, part of a wave of countries buying their own debt and making yields less attractive for investors.

2013: Record Alts

Assets invested in alternatives hit a record high of $7.2 trillion, though many investors still allocate only a small percentage of their portfolios to this class. Institutional investors control about 60% of the money flowing into alternatives.

2016: Negative yields

Billions of bonds in Japan and the United Kingdom go into negative yield territory, which leaves bond investors reaching for yield in other asset classes.

Present: Alts for All

There are more liquid alternative strategies available than ever. These span long-short equity, market neutral, managed futures and other investments that work to provide the next wave of diversification. More diversity and quality is available than in prior years.

The trend of countries buying their own debt continues to make yields less attractive for investors. Between local and federal government efforts, the U.S. owns 67.5% of its own Treasuries.

Research shows that a more balanced blend of stocks, bonds and alternative investments can help investors achieve portfolio diversification.

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