Harry Merriken, chief investment strategist at Gateway Investment Advisers [profile], a Natixis shop, wrote a guest column on On Wall Street. He gave three reasons to build a more diversified portfolio: Increased volatility, rising rates and high correlations. These factors challenge the traditional 60 percent equities and 40 percent fixed-income mix.

Crises like that of 2008 have taught us that traditional portfolio diversification doesn't always work because the correlation of assets such as stocks, bonds and commodities are increasing and exposing each of the classes to each other. Stock market volatility has spiked in the past 10 years and low interest rates will move higher, which also throws a wrench in the purpose of diversification as protection against risk.

What is the only diversification option left? Alternative assets: the fourth asset class.

With more focus on risk, advisors and investors are increasingly open to alternative assets. Alternative strategies run the gamut, but a key technique is shorting which helps allow for negative correlation with other assets. The long-short equities mutual fund space picked up $6.4 billion in new assets during 2012, according to Morningstar Inc.

Hedged equity is becoming increasingly popular as a strategy because it provides less volatility problems, along with a bond-like risk and return profile. To read the full article, click here. 

Edited by: Casey Quinlan


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