Downside protection is the alternatives goal for a number of clients at adviser Ian Weinberg's office.
His search for an instrument that can make money without relying on traditional stock and bond investments has led him to the world of structured notes.
“We like limited risk and an absolute-return capability, so we're incorporating certain structured notes issued by large banks,” said Mr. Weinberg, chief executive of Family Wealth & Pension Management LLC, which handles more than $200 million. The firm's clientele — wealthy families — makes it easy to pool cash to obtain customized structured notes.
Essentially, the notes provide clients with a way to participate in what otherwise would be a risky instrument with some downside protection, depending on how much its connected investment declines.
CONTRARIAN PLAY
Structured notes shine when markets take a dive; the firm's use of the notes dates back to 2008, at the depth of the recession.
The most volatile times presented an opportunity in the form of a structured note tied to the Chicago Board Options Exchange Market Volatility Index (Vix), which follows the volatility of the S&P 500.
The opportunity to snap up the notes arises two to four times a year, Mr. Weinberg said. To put things into perspective, on Oct. 24, 2008 — amid the credit crisis — the Vix index went as high as 89.53 during intraday trading. Things have calmed considerably since, but the index spikes once in a while.
“The Vix has been in the teens, but sometimes it floats up into the 20s and 30s, and there's a structured note out there that captures that move with some good downside protection,” Mr. Weinberg said.
“We're not investing with the premise that the market is good,” Mr. Weinberg added. “We're investing to achieve a high probability of success that this volatility won't go away.”
Another positive attribute of investing with structured notes: They've run counter to the most popular alternatives, as there have been periods in which alternatives such as commodities and oil start to move in step with stocks, according to Mr. Weinberg.
If a structured note has strong prospects, clients could have about 20% of their funds put into such a strategy.
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Betting that interest rates will ultimately rise, Family Wealth also has a strategy that uses inverse-bond exchange-traded funds. Mr. Weinberg opts for the ProShares Short 20+ Year Treasury ETF (TBF).
"ARTIFICIALLY SUPPRESSED'
“It gives clients a pure inverse return to what the long-term-Treasury index is doing,” he said. “There are other economic conditions in the world, and interest rates are so artificially suppressed — they can't stay down forever.”
This tactic, which is a play for customers with bond portfolios, might get a 5% to 10% allocation of assets.
Mr. Weinberg is also exploring the Riverpark Short Term High Yield Fund (RPHYX), which features bonds maturing in 60 to 180 days.
The fund invests in bonds issued by companies that are having either a funding event or a reorganization that will improve their ability to meet their debt obligations.
“There might be only a few months left on these bonds, so this creates a nice opportunity for a smart manager to buy up this paper and achieve about a 3% yield,” Mr. Weinberg said. “It's a strategy that's exploiting the inefficiencies in the bond markets.”
No alternatives strategy is complete without regular monitoring and funding.
Every 12 months, the adviser sweeps gains from equities and other correlating assets, and then deploys the profits into noncorrelated assets and alternative strategies.
“We take the gains that have been realized from risky assets, such as U.S. equities and emerging-markets equities, and we sweep the gains out,” Mr. Weinberg said.
“It's like building a moat around your portfolio. You're protecting your gains.”
Indeed, the strategies are more a way to protect gains than to attain them.
“The wealth has been created already, so when we deploy alternatives, we're looking to hit singles and advance runners,” Mr. Weinberg said.
dmercado@investmentnews.com Twitter: @darla_mercado
