As part of the conference flurry this week, Attain has been popping in at NAPFA for several panels. One that caught our attention was “Understanding Alternative Investing” with David Wright, Managing Director with Sierra Investment Management. It wasn’t what we’d call a love-fest for alternatives (how often do you hear an alternatives guy say hedge funds are products of greed and nothing but compensation structures?), but that made it all the more interesting.

Wright pointed out in his presentation that the term “alternative” can apply to either the types of investments made or to the strategy itself, often causing confusion (your alternative stock market strategy may move in line with stocks, whereas an alternative investment may not). Unfortunately, he believes the term is abused by marketers across the industry, and is functionally an attempt to lure in institutional money (and in our view, more recently – the retail money as well with the advent of alternatives mutual funds).  Regardless of how abused the phrase may be, Wright understands that true alternatives are critical for investors today. As he explained, this is not a normal post WW2 recovery.  Full employment, in his opinion, will not be achievable until the U.S. develops several new industries.  As he put it, if population growth is at 1.1% and GDP only grows at 1%, standard of living and production per capita is actually going down… meaning a recession.

As Wright explained, there have been 3-4 times as many large daily moves in the S&P 500 as Gaussian distributions would expect (which we’ve touched on before), and while you can’t predict future performance based on what happened in the past, you can, with confidence, predict that volatility can and will rear its ugly head again.

Are you ready for it?