Alternatives: Buy the Umbrella Before It Rains

by: , Chief Investment Officer and Managing Director | IndexIQ

The past never perfectly reflects the future, but it does leave hints. Markets tend to move in cycles, from periods of extreme skepticism to periods of extreme conviction. The problem for investors is that it’s never really possible to know where you are on the timeline. So, you know things will change; you just don’t know when.

We’re now in the midst of one of the longest bull runs in history, though given the generally modest day-to-day upticks in the averages, it may not seem like it. Significant corrections have been few and far between. But, as the saying goes, “There’s always something.” For the last year or so, a major concern has been that, in the words of one columnist, “Investors are worried that investors aren’t worried enough.”

That won’t go on forever. Eventually, the markets will seize on a new worry, or revisit an old one, and things will be different. History suggests that this may happen suddenly, and without much in the way of warning. Many liquid alternative funds were designed with exactly this in mind. By investing in non-correlated asset classes, they offer investors continued market exposure, paired with the potential to mitigate downside participation.

Volatility is something else to think about. As the market has moved up, volatility has moved down. But, that’s unlikely to persist either. While volatility (price fluctuations) and drawdown risk (loss of principal) aren’t the same thing, dramatic price movements often lead investors to trade their portfolios at what, in retrospect, will turn out to have been an inopportune time. By managing volatility, alternative funds can make it easier and more palatable to stay the course.

Of course, no one really likes the person who wanders down the beach on a beautiful morning saying, “Yes, but one day, it will rain again.” The truth is that a sunny day might not be a good time to be a seller of umbrellas, but it’s often a good time to be a buyer.

About risk:

All investments are subject to risk and will fluctuate in value. Past performance is not indicative of future results. An investment can’t be made in an index.

The information and opinions contained herein are for general information use only. IndexIQ does not guarantee their accuracy or completeness, nor does IndexIQ assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are as of the date of this report, are subject to change without notice. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the mutual fund. NYLIFE Distributors LLC is located at 30 Hudson Street Jersey City, New Jersey 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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