Many investors are attracted to alternative investments as a means of diversifying portfolio risk and/or enhancing expected returns. These objectives are usually considered within some version of modern portfolio theory (MPT), wherein historical or projected risk and return assumptions are used to ‘optimize’ a portfolio. Unfortunately, many alternative investment strategies violate several of the assumptions required by MPT (including a normal distribution of returns). In addition, alternative strategies are usually constantly evolving. As such, using models that assume the past will repeat (in terms of returns and risks) may lead to disappointment.

We help investors understand the distributive attributes of various alternative investments and strategies, and customize combinations of these elements to better respond to investment objectives. Instead of relying on MPT to define optimal alternative strategies and allocations, we utilize statistical analysis to help us understand the attributes of specific return distributions, and how those attributes will impact outcomes. With a better understanding of the ‘volatility of return volatility’, we can then help our clients design strategies that are more likely to deliver diversification benefits when they are needed most.