A big talk in asset allocation has been the search for yield, but it is just as important to remember there has been a search for diversification. These two key searches intersect with allocations to alternatives. Smart investors, endowments, have been actively putting their money to use with alternatives. A recent survey shows the allocation to alternatives by universities is now over 50%. Fixed income has been cut out of the portfolio and sits at 10%. The search for yields has led away from traditional bond allocations. Total equity between domestic and international is at 28%, but a large portion of the alternatives exposure is likely to be long/short equity strategies.
Endowments have abandoned the 60/40 stock/bond mix and focused on strategies that give higher returns than bonds, similar volatility, and low correlation to core equities. Bonds have been a low correlated asset to stocks but the benefit is reduced when yields are low. Alternative strategies have volatility levels closer to bonds with a further diversification and return kicker.
The market has responded to this demand with a significant increase in liquid alternative offering for every sized client. The issue is not whether you have alternatives in your portfolio but how much exposure.
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