All True Diversifiers Are Alternatives, But Not All Alternatives Are True Diversifiers

We couldn’t agree more with this headline coming to you from Long Board Funds. In their recent post, they seek to clarify true diversification, something that seems to be tricky in a world where the mind-hive of financial journalists can’t agree on how to define them.

Wall Street has had a difficult time properly labeling and categorizing alternative strategies. One firm will group them differently than another, and many use the same language to describe different strategies. This leads to a lot of confusion among investors who are uncomfortable, and rightfully so, with allocating a large amount to alternatives without clear expectations.

All of these factors have combined to heighten frustration with alternative investments. Investors need tools to get past this barrier and begin to understand the role that alternatives should play in their portfolios.

So what are the true diversifiers and what are alternatives in name only? Long Board came up with a nice graph to help out investors.

Investment strategies that historically deliver both:

  1. lower risk (through lower correlation in declining markets)
  2. Increased returns

We applied this definition to the last 15 years’ worth of data and 6 true diversifiers emerged:

Diversifiers, Alternatives, Long Board Funds

Chart Courtesy: Long Board

This graphic reminds us a little of the one we did earlier this summer, asking investors if their alternative investments were doing what it should be doing. We do have issues with a couple of those Long Board identifies as “True Diversifiers” that we outline in our “The Truth and Lies in Alternative Investments.” But we will say they that they are closer to true diversifiers than others, so we guess that’s something.

As Long Board points out, there might be discrepancies over what it and isn’t a diversifier, why alternatives provide the returns they do in different environments, but there’s enough research out there for investors to find what they’re looking for. In you’re one of those people, we recommend reading our latest report, “Why Alternative Investments” which is a one stop shop to understanding the vastly growing world of alternatives, and what type of alternatives you’re truly seeking.