But Mr McDermott queries whether some types of alternative strategies are suited to retail investors. “They can be very much momentum-led and investors could get caught up in a ‘hot money’ play very easily. For example, the massive fall in the gold price [between 2013 and 2015] was exacerbated by the fact that a lot of money had piled into gold ETFs and was then pulled out very quickly,” he says.
“When it comes to oil, if you don’t want to buy actual barrels or oil company shares, then you could buy an ETF, but you have to think about contango and backwardation – not concepts most retail investors are familiar with.”
Ben Seager-Scott, director of investment strategy and research at Tilney Bestinvest, also doubts the suitability of using alternatives in an ETP or passive format, although he admits there will be demand for these products.
“ETPs generally work best for large asset classes that are liquid and transparent – which is why they tend to work well for areas such as UK large-cap equities, where you can easily buy a FTSE 100 ETF, or UK gilts,” he says.
“ETCs can also work fairly well for other physical, non-perishable and easily-stored commodities, such as other precious metals and industrial metals, but it is much less feasible to physically hold something like oil or wheat. These ETCs are more sophisticated and use derivatives, usually based on futures pricing.
“I think alternative asset classes are fairly safe from the passive industry threat, which is more focused on equity themes and styles as well as fixed income.”
Ellie Duncan is deputy features editor at Investment Adviser
