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Season 1, Episode 6: Volatility and Income

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Meet Our Guest

Welcome to Season 1, Episode 6 of Meet the Expert® with Elliot Kallen! In this episode, Elliot is bringing on Jeff Wycoff and Russ Kellites of AlphaCentric Funds from San Francisco to discuss alternative investments.

Jeff Wycoff, Portfolio Specialist and Russell Kellites, Portfolio Manager at AlphaCentric Funds, discuss alternative investments and how to manage market volatility. 

When composing a portfolio, the most optimal approach is to find assets or asset classes to complement each other. Stocks tend to move together, and bonds tend to move together, so if you want something to balance your portfolio, you need to find an asset class outside of those two main pillars.

jeff Wycoff

Portfolio Specialist

What are alternative investments?

An alternative is broadly defined as something that hasn’t yet become a standard in the portfolio, but has a positive expected return.

Alternatives are investments that don’t fall into traditional investment categories—namely long-only stocks, bonds, or cash.

As civilization and markets advance, new things come out that later on become essential parts of your portfolio. In fact, at one point, stocks and bonds were alternatives to corn, crops, and cows. In the world of alternatives, there is oil and gas, real estate, gold and other precious metals, and many other investments.

Profits are treated as capital gains, which are preferential to income, and come from the uncertainty in markets. Just like insurance companies need to take more in premium than they pay out in claims, the same thing is true with the options market. In fact, you receive a premium when you sell an option.

What are the best alternative investments?

To find the best alternative investments, look at specific areas and how they can complement a diversified portfolio.

When considering how to moderate financial risk, if you have a diversified portfolio of assets and all of them have positive expected returns and they’re uncorrelated to each other, then the overall upward trend allows you to hedge against the zigging and zagging of various investments.

When composing a portfolio, the most optimal approach is to find assets or asset classes to complement each other. Stocks tend to move together, and bonds tend to move together, so if you want something to balance your portfolio, you need to find an asset class outside of those two main pillars.

How can you capitalize on the current market volatility?

October is, historically, a very volatile month. The conference board is going to come out with its October report for GDP growth, which is a pivot time when you have the second and third quarter economic outlooks released in October.

Then, you have a majority of the big cap S&P 500 names that report in October.

Then, you also have the second wave of COVID-19 coming in October.

Moreover, at this current time, we’re seeing a lot of social and political upheaval. There are protests, there are riots, and we have the election coming up in November. All the polls are going to speak to who is potentially going to become President in October.

The ‘October surprises’ seem to happen in every presidential cycle, and are potentially politically catalyzed events that are unforeseen and can drive the markets one way or the other.

Lastly, you have the seasonality effect, which frequently happens because September is the fiscal year in for mutual funds, and they’re going to do a lot of tax loss harvesting and moving around the portfolio. There’s a lot of hedging that’s done in October, so you have this converging of events that may or may not happen every year but they have a lot more meaning this year. So, the cost to insure is very high.

That’s been a potential opportunity for those with options, who can monetize on the extra premium that one would receive for that uncertainty in October.

When looking across the calendar landscape, the cost to ensure financial assets for each month—from July through November—increases in October, relative to the surrounding months. In this case, increased cost allows clients to make even more money. Over a very short period of time, volatility is the friend of option strategies! Granted, you never know at what point it’s going to be the most profitable, similarly to how you know stocks will go up over time, but don’t know exactly when or where.

However, in general, volatility or uncertainty is beneficial because it serves as a diversifier. Where once upon a time, uncertainty used to be good for bonds, it’s probably not going to offset nearly as much risk as it has in the past. That’s why people add alternatives or other sources of return in their portfolios.

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DISCLAIMER: Prosperity Financial Group and Meet the Expert® with Elliot Kallen do not make specific investment recommendations on Meet the Expert® with Elliot Kallen or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of the Meet the Expert® with Elliot Kallen guests, and not necessarily of Elliot Kallen or Prosperity Financial Group.

Jeff Wycoff

Portfolio Specialist

Russell Kellitis

Portfolio Manager – AlphaCentric Funds

Meet the Expert

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If you’d like to learn more about any of these topics and how it affects your finances– contact me today.

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