Alternative Investments What has to happen for you to make money?
For most portfolios the honest answer is one thing: stocks have to go up. Hundreds of holdings can still be one bet.
We diversify the sources of return, not the number of positions.
For investors and families with $5 million or more.
Count the reasons it can make money, not the number of holdings.
Diversification can fail when it’s needed most.
Different markets usually move differently. Under stress, they can fall together. From the stock market’s peak in October 2007 to its low in March 2009, almost everything sold as diversification fell at once. Of the markets below, only high-grade bonds rose.
October 9, 2007 to March 9, 2009: almost everything fell together.
| Real estate, U.S. REITs | −69.3% |
|---|---|
| Emerging-market stocks | −62.7% |
| International stocks | −60.2% |
| U.S. stocks, S&P 500 | −55.3% |
| High-yield bonds | −32.9% |
| 60% stocks, 40% bonds | about −30% |
| Commodities | −27.4% |
| High-grade bonds | +7.4% |
Total returns with dividends reinvested, from the S&P 500’s closing high on October 9, 2007 to its closing low on March 9, 2009. U.S. stocks: S&P 500 Total Return Index. The other markets are measured by funds that track them, after the funds’ expenses: EFA, VEIEX, VNQ, HYG and DBC, with AGG for high-grade bonds. The 60/40 mix is 60% S&P 500 and 40% AGG, bought and held. Source: Yahoo Finance. Indexes can’t be invested in directly.
When everything depends on the same thing, everything can fall at once.
Returns add. Risk doesn’t.
Ray Dalio calls it the Holy Grail: engines driven by different forces can offset each other’s risk.
Return-to-risk gain from combining engines
Ten asset classes driven by one economy are one engine.
We care more about what drives the return than what the investment is called.
An alternative isn’t valuable because it sits outside stocks and bonds. We want to know what has to happen for it to make money, when it can lose, what it costs, how easily it can be sold, and whether it changes the risks your family already carries.
We run our own alternative strategies alongside the core portfolio. Each is designed to make money for a different reason, and to fail for a different reason. The second part matters more.
- Following trends, up or down.Across stocks, bonds, currencies and commodities, designed to profit from sustained moves in either direction.
- Owning hedges when they’re cheap.Positions designed to gain in a large decline, bought when they cost the least.
- Options with a known cost.The cost is known before the position is placed.
And when someone else has an edge we don’t?
We do the research and due diligence to access it. Nothing is off the table, and everything has to earn its place. Some strategies are open only to investors who meet regulatory standards. We’ll tell you which.
Most candidates don’t make it in.
Something can look different on a statement and still depend on the same thing as everything else. Or the edge can be real and the fees can take all of it.
Five candidates, judged by what drives them.
| Candidate | What has to happen for it to make money | Verdict |
|---|---|---|
| Trend following | A sustained move, up or down, in almost any market. | KeptA different driver from stocks rising. |
| Defensive hedges | A large, fast decline. | KeptSized so its cost is tolerable in calm years. |
| An outside manager | A skill we can verify and can’t do ourselves. | Case by caseAfter research and due diligence. |
| Long/short stock fund | Mostly, stocks going up. | RejectedThe same market risk we already own, at higher fees. |
| Covered-call income | Calm, flat or rising markets. | RejectedGives up the upside and keeps the downside. |
Each candidate is judged on its own terms, and none is right for every portfolio.
What every alternative has to show us.
- A reason it should workWhat has to happen for it to make money.
- Evidence after costsResults that survive fees, trading costs and taxes.
- Behavior under stressHow it moved in 2008, 2020 and 2022.
- How easily it can be soldDaily, quarterly, or locked up for years.
- What it addsWhether it changes the risks the family already carries.
- Who runs it, and howThe manager, the controls and where the assets sit.
- The feesWhat’s left of the edge after everyone is paid.
- TaxesWhat the investor keeps, not what the fund reports.
- Who can own itSome strategies are open only to investors who qualify.
Relationships between markets change under stress.
No hedge or alternative can promise to hold up exactly when it’s needed. So each one is sized to make being wrong tolerable.
Every alternative has to answer three questions.
- 01What can it lose?
- 02What could it realistically earn?
- 03After its costs, is it worth it?
Questions about alternatives.
What are alternative investments?
Investments designed to make money for reasons other than stocks and bonds going up, such as following trends in either direction, positions designed to gain in a large decline, or options with a known cost. At Shell Capital Management, an independent, fiduciary registered investment adviser in Knoxville, Tennessee, we run our own alternative strategies alongside ASYMMETRY® Managed Portfolios, and research outside managers when they have an edge we don’t.
Do alternatives make money when stocks fall?
Some are designed to. None can promise to. Relationships between markets change under stress, which is why each one is sized so that being wrong is tolerable.
Can I get my money out?
It depends on the strategy. Some are as easy to sell as the rest of your account. Others, such as private funds, can hold your money for a set period. We tell you which, in writing, before you commit.
How much of a portfolio should be in alternatives?
It depends on what the rest of your money already depends on. We start there, and size each one so that being wrong is tolerable.
Who can invest in them?
Some strategies are open to any client. Others are open only to investors who meet regulatory standards for income or net worth. We’ll tell you which apply to you.
Ask us what your portfolio depends on.
We’ll tell you what has to happen for it to make money, and what would hurt it most.
If you write, I’ll read it myself.
Mike Shell, Founder & Chief Investment Officer
Related: ASYMMETRY® Managed Portfolios, ASYMMETRY® Portfolio Hedging, Trend Following, Tail Risk Hedging and Convexity.