NEW YORK (TheStreet) -- As we exit the low interest rate era and return to rising rates, bonds and other fixed income instruments will come under selling pressure. This means in 2014 investors will be hunting for bond replacements in order to help safeguard their portfolio without having to account for falling bond prices and volatility.Some investors will migrate to one or more of the hybrids -- floating rate securities, step-up bonds and Treasury inflation protected securities. However, I'm seeing sophisticated investor moving into some questionable alternatives (in my mind) and I just want to highlight the downside and risks associated with those instruments. In particular, I'm seeing investors discussing master limited partnerships, interest rate linked structured notes and bank loan products as if they were interchangeable with bonds. They're not and here's why.
If the investor's thesis proves correct, then the IRL will rise in value, potentially generating above market rates of return. Conversely, if the thesis is incorrect, as a result of the aggressive nature of IRLs, investors could lose the entirety of their investment. The takeaway: Interest rate linked structured notes should not be compared to bonds, as they are mostly used as speculative instruments and in seldom cases as part of a complex hedging strategy.