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Dispersion of Alternatives

In his latest AlphaCore Insights, Director of Research Jonathan Belanger explains why the allocation of alternatives is such a critical step. The concept of dispersion - or how accurately an average describes one of its members - can be a tricky one in this case. Because alternative strategy funds have such a wide distribution of returns, taking a category average is not a good representation of alternative performance. In fact, dispersion in alternatives can be two to four times greater than with traditional strategies. This is because at their core, alts are flexible – and that flexibility often comes at a cost.

When describing an allocation to alternative strategies, we believe an investor “trades market risk for manager risk” - meaning the how and why a manager succeeds (or underperforms) is the most important part of the manager selection process. The complicated and time consuming nature of alternatives as it relates to dispersion means investors really need an expert well versed in these vehicles leading their portfolio.