Seeking safe havens? Analysts, advisors point to liquid alternative funds
Keep it simple: Investors who are looking to allocate into liquid alternatives should carefully consider the fund's investment structure and the specific risk it is trying to hedge, according to FINRA.
Managed futures funds, for example, seek to deliver diversification benefits by owning assets with a low correlation to the markets, including but not limited to commodities. Multicurrency funds typically bet against the U.S. dollar by investing in a broad basket of foreign currencies.
And nontraditional bond funds aim to provide income protection against rising interest rates through the use of fixed-income derivatives and other unconventional tactics.
Most average investors, however, would be best served with a multistrategy fund, said Lafferty, which delivers broad exposure to a diversified portfolio of hedge fund–like strategies.
"For someone just dipping their toe in, a multistrategy fund makes it simpler to access alternative strategies without having to understand all the nuances of the underlying portfolio," he said, noting investors need to consider the expertise of the fund's management team.
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How much is too much? The Morningstar survey found financial advisors recommend an allocation of between 6 percent and 20 percent to liquid alternatives.
Alternative investment strategies that are packaged into traditional products, like mutual funds and ETFs, have leveled the playing field for managing market risk.
However, while the asset class is likely to play an increasingly pivotal role in the average investor's portfolio, very few 40 Act funds have had the chance to prove themselves through a market crisis.
"Advisors are becoming more comfortable recommending liquid alternatives, but these funds are going to have to live up to the diversification, performance and risk promises to stay top of mind with investors," Lafferty said.
—By Shelly K. Schwartz, Special to CNBC.com