Alternative exposure in volatile times

Uncertainty in 2008 means the degree with which advisors navigate the choppy water and think out-of-the-box is all the more essential. Rather than helplessly riding the ups and downs of volatile markets, qualified investors may be advised to consider alternative portfolios with targeted hedge fund exposure which deliver low-correlated, and in many cases, better risk-adjusted and absolute returns. While there are many avenues to consider, I've selected three fund-of-hedge-fund strategies with which to gain returns that outperform the market over time and as importantly, with much less volatility. These are:

1) A multi-strategy, multi-manager portfolio of hedge funds

2) A niche, single strategy multi-manager portfolio of hedge funds

3) A tax-deferred, structured portfolio of hedge funds

Multi-strategy hedge fund exposure -- In attempt to achieve greater risk protection, especially in volatile markets, a multi-strategy hedge fund portfolio typically employs diverse strategies that have little correlation to the major markets or to one another. Such multi-strategy hedge fund portfolios can potentially mitigate the risks associated with investing in any single strategy or manager. Taking the page from Modern Portfolio Theory, a properly constructed multi-strategy hedge fund portfolio combines the right mix of asset classes that can generate long-term out-performance.

Niche-specific hedge fund exposure -- Another path to constructing a lowly-correlated, better risk-adjusted return portfolio is to specialize in niche or underutilized strategies and markets. For those willing to dig deeper and examine further, opportunities may exist in more niche sectors such as direct asset-based lending, commercial real estate financing funds, and intellectual property rights funds and media distribution funds. Opportunities are also emerging in the nascent markets of carbon credit and electricity grid trading as well as shipping credits and weather derivatives. For advisors with a significant high-net worth client base, exposure to these strategies via a properly constructed fund-of-hedge-funds can result in more stable, lowly-correlated out-performance, better equipping advisors to meet their clients' investment objectives. It is worth noting that most of these strategies do not invest in capital markets and therefore, have very low or even negative correlation to the major market indices.

Structured hedge fund of funds -- For advisors with a sophisticated client base, structured hedge-fund-of-funds products can provide certain advantages over direct fund ownership. Qualified high net-worth clients can benefit from custom structured pay-off and/or principal protection, enhanced returns through non-recourse leverage, tax efficiency, and improved regulatory capital treatment. Judicious employment of derivatives and leverage on hedge-funds-of-funds can provide investors with the opportunity to capture these benefits while minimizing corresponding risks. Many qualified investors may factor in a Private Placement Variable Universal Life Insurance (PPVUL) vehicle when dealing with estate planning.

Certainty in simplicity -- Rather than passively letting the S&P 500 determine the mood for the day, advisors should proactively collaborate with qualified investors on using these strategies. Seeking alternative exposure during these volatile times can offer qualified high net-worth clients the opportunity to think out-of-the-box and reflect upon the certainty of tenets behind investment management.

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