What is LALT? (Pros, Cons, and Strategies)

In today's volatile financial landscape, diversification and risk management are paramount for investors. One innovative solution gaining traction is the First Trust Multi-Strategy Alternative ETF, commonly known by its ticker, LALT. This ETF provides exposure to a variety of alternative investment strategies, aiming to deliver a diversified source of returns that is less correlated with traditional markets. In this blog post, we'll delve into what LALT is, its key features, and the pros and cons of including it in your investment portfolio. Additionally, we'll explore potential strategies for making the most out of this unique investment vehicle.

What is LALT?

LALT stands for the First Trust Multi-Strategy Alternative ETF. As its name implies, LALT seeks to provide returns through a diverse set of alternative investment strategies. These strategies can include long/short equity, market neutral, global macro, and other non-traditional investment methods.

LALT aims to provide diversified and less correlated returns with the traditional equity and bond markets, making it an attractive option for risk-averse investors or those looking to diversify their portfolio further.

Key Features of LALT

• Multi-Strategy Approach: Employs a variety of alternative strategies including long/short equity, market neutral, global macro, etc.
• Low Correlation: Aims to provide returns that are not closely related to the movements of traditional stock and bond markets.
• Active Management: Actively managed to adapt to changing market conditions.
• Diversified Exposure: Offers exposure to multiple asset classes and strategies within a single ETF.

LALT Composition

LALT is composed of a mix of underlying investment strategies managed by various sub-advisors, each specializing in different areas. This multi-manager approach ensures that the ETF remains diversified across multiple strategies and asset classes. As a result, LALT includes a variety of holdings from equities to fixed income to commodities and other alternative assets.

Pros of LALT

Diversification

One of the primary benefits of LALT is the diversification it offers. By investing in multiple alternative strategies, it decreases the risk associated with reliance on traditional equity and bond markets. This can be particularly valuable during periods of market turbulence when traditional assets may underperform.

Reduced Correlation with Traditional Markets

LALT aims to provide returns that are less correlated with the broader market. This characteristic can help cushion your portfolio against significant downturns in the stock or bond markets, offering a degree of stability during volatile periods.

Flexibility and Active Management

LALT is actively managed, allowing the fund's managers to adapt to changing market conditions. This flexibility is crucial for alternative investment strategies that require nimbleness and tactical adjustments based on current market trends.

Risk Management

With its focus on strategies that have lower correlation to the broader market, LALT can serve as a risk management tool within a diversified portfolio. This aspect is crucial for investors seeking to manage risk and return efficiently.

Cons of LALT

Higher Expense Ratio

One notable downside to LALT is its higher expense ratio compared to some traditional ETFs. The fees associated with actively managed and multi-strategy funds are generally higher due to the complexity and resources required to manage them.

Complex Underlying Strategies

The underlying strategies of LALT can be complex and may not be fully transparent to all investors. Understanding the risks and potential returns of each strategy can be challenging, making it less suitable for novice investors or those not well-versed in alternative investments.

Potential for Underperformance

Despite its diversification and active management, there is no guarantee that LALT will outperform traditional investments. In certain market conditions, the strategies employed by LALT may not deliver the desired returns, leading to periods of underperformance.

LALT Investment Strategies

LALT is best suited for investors aiming for long-term diversification and those seeking exposure to alternative investment strategies. Below are some strategies to consider when investing in LALT:

Long-term Diversification Strategy

Incorporate LALT as a part of a diversified portfolio to reduce overall risk. This strategy aligns with the idea of not putting all your eggs in one basket, as LALT provides exposure to alternative asset classes and strategies that behave differently from traditional equities and bonds.

Complementary to Traditional Investments

Use LALT as a complementary holding alongside traditional ETFs focused on stocks and bonds. This approach can help smooth out portfolio returns and mitigate risks during market downturns.

Tactical Allocation

Consider a tactical allocation strategy where you adjust your exposure to LALT based on market conditions. During periods of high market volatility or economic uncertainty, increasing your allocation to LALT can help balance the portfolio by reducing exposure to traditional market risks.

Rebalancing Strategy

Regularly rebalance your portfolio including LALT to maintain your desired asset allocation. This helps in capturing gains from outperforming assets and reallocating to underperforming ones, optimizing your portfolio's risk-adjusted returns over time.

In conclusion, LALT offers investors an avenue to diversify their portfolios through a variety of alternative investment strategies. While it has its advantages, such as reduced correlation with traditional markets and active management, it also comes with higher fees and complexities that need to be considered. By employing thoughtful investment strategies, investors can potentially harness the benefits of LALT to achieve their financial goals.