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Summary Many advisors and their clients are now in the process of reviewing last year’s performance and discussing how to best position their portfolios for what’s to come. I believe they should examine how alternative investments could be included in portfolios to potentially help achieve specific investment objectives. This piece lists four ways investors can use alternatives in seeking to meet common objectives. By Walter Davis Many advisors and their clients are now in the process of reviewing last year’s performance and discussing how to best position their portfolios for what’s to come. These reviews are taking place against the backdrop of a multi-year bull market in equities, low interest rates, low levels of market volatility, a strengthening dollar and declining oil prices. As advisors and clients look to navigate this landscape, I believe they should examine how alternative investments could be included in portfolios to potentially help achieve specific investment objectives. To help with this task, I have listed four ways investors can use alternatives in seeking to meet common objectives. Objective: Continue to participate in equity market upside, but with some downside protection. Investors have enjoyed a strong run in equities over the past six years, and most analysts I have read predict 2015 to be another positive year. That said, investors have also seen increased risks come into the market, such as Greece’s future in the eurozone. For investors looking to participate in a rising equity market, while also seeking to limit the downside if the market declines, equity long/short funds may be able to help. Equity long/short funds combine both long and short equity positions in a portfolio, while typically being net long to equities. In these types of funds, the long positions would be expected to capture gains in a rising equity market environment while the short positions would be expected to profit in a falling market environment. Because these funds are frequently net long, the direction of fund performance often tracks that of the overall market. Objective: Participate in market opportunities outside of stocks and bonds, such as in the commodity and currency markets. In 2014, the U.S. dollar appreciated over 10% against its counterparts, and the price of oil fell by almost 50%. Global macro funds invest across the global markets in equities, fixed income, currencies and commodities on a long and short basis. Such funds could have had the opportunity to profit from the rally in the U.S. dollar through long U.S. dollar positions, as well as from the decline in oil through short oil positions. Objective: Cushion portfolio during market swings . One theme I have seen repeatedly mentioned by market analysts is the return of market volatility to normal historic levels. Over the past six months, we have seen short periods of heightened market volatility, most recently during the first two trading weeks of 2015. For investors looking to cushion their portfolio during increased market swings, market neutral funds might be appealing options. Such funds seek to eliminate the impact of broad market movements by trading related stocks on a long and short basis, and seek to generate positive returns regardless of market environment. Objective: Generate attractive levels of income in the current low interest rate environment . With interest rates at historic lows, many investors, especially retirees, are seeking to earn an attractive level of current income off their investments. Two places that investors can explore are real estate income funds and bank loan funds. Real estate income funds invest in global real estate equity and fixed income securities and seek attractive current income. Bank loan funds seek to provide a high level of current income and capital appreciation by investing in senior loans made to corporations (usually rated below investment grade) by large banks and other financial institutions. Important Information Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. There is no guarantee the strategies discussed will meet their investment objectives. Investors should consider their risk tolerance and individual situation and carefully review all financial information before investing. Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money. The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded. Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid. Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. 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