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Choose Wisely: Six Tips For Selecting Alternative Managers

Choose Wisely: Six Tips For Selecting Alternative Managers by Marc Gamsin and Greg Outcalt, AllianceBernstein

Alternative investments have delivered over the long term, but individual strategies can be as different as the day is long. We have some ideas on how to cut through the clutter.

Alternative investment strategies typically access a wider investment universe—and have more flexibility—than do traditional strategies. Market movements, or beta, tend to have less influence on alternative returns than on traditional equity or bond returns.

Different alternative strategies perform in dissimilar ways in times of stress, and there’s quite a bit of dispersion among manager returns—even within the same strategy category (Display). There is no typical performance, and this makes understanding each manager’s approach essential. If you don’t choose the right strategies and managers, your alternative allocation could help your portfolio a lot less than you think—and might even work against you.

The first thing to do is understand the categories you’re looking at, whether you’re looking for a single strategy or building a diversified allocation. There are many categories, with common ones including long/short equity, event driven, relative value and global macro.

It makes sense to get to know all the categories so you can decide what’s best for your portfolio. But that’s just the beginning. It’s important to narrow down the choices to the strategy or strategies that work best for your alternative allocation. Over the years, we’ve found these six...