It wasn't the plan that was flawed, it was the execution.

Now two years out from the steepest market decline since the Great Depression, the consensus among many is that modern portfolio theory-so harshly criticized during the depths of the financial crisis-is still the most valid approach to portfolio design. The problem, and the criticism, stemmed from the fact that too many investors and their advisors failed to include a sufficient amount of truly negatively or neutrally correlated asset classes into the mix. In other words, they didn't implement modern portfolio theory correctly.

That realization has led to a boom in the use of alternative investments in hopes of avoiding the next major market meltdown. "People are looking for strategies that will protect the downside," says Lee Spelman, managing director of U.S. Equities for JP Morgan. "Alternatives help provide that protection because many have very low or negative correlation to traditional asset classes."

But the question remains: If blending various asset classes is the core of modern portfolio theory and the key to reducing risk, then why weren't alternatives more widely utilized all along?

Several reasons. The first, according to Spelman, is access. "Where alternatives used to be available only to the high-net-worth, today they're accessible to almost anyone."

That accessibility comes in the form of a slew of relatively new mutual funds, ETFs and structured products that have come to the market in just the past three years. Morningstar now classifies over 400 distinct mutual funds and ETFs among five broad categories of alternative investments, including long/short, currencies, equity precious metals, bear market and market neutral. When adding commodities to the mix, that universe swells to over 500. "Ten years ago, alternative investments had less than 1% of all assets invested in mutual funds and ETFs," says Joe Barrato, CEO of Arrow Investment Advisors. "Today alternatives make up slightly less than 5%."

Another reason why alternatives have not been more widely utilized, according to Barrato, is simple motivation. "When you're in a screaming bull market, people don't want alternatives," he says. To be sure, the bull market of the late 1990s rewarded investors for increasing their equity exposure, which helped set the stage for much of the pain in 2008.

There are differing views on what exactly constitutes "alternative investments." Barrato defines alternatives as anything that is non-correlated to traditional asset classes such as stocks or bonds. These include REITs, currencies, commodities, managed futures, precious metals, hedge funds and long/short equity strategies.

Chris Butler, VP of alternative investments for Raymond James, uses an even broader definition. "The term 'alternative investments' describes a very broad universe of investment strategies. That said, we define alternative investments as investments that have the potential to further diversify portfolios and enhance returns by either employing nontraditional asset classes, like commodities or real estate, or investing in traditional asset classes in nontraditional ways."

One of the most popular nontraditional methods of investing in traditional asset classes involves the use of shorting stock positions. According to Spelman, shorting allows the manager to make use of the other half of a firm's investment research. "As analysts examine an industry, they come up with stocks they like and stocks they don't like," says Spelman. "Shorting allows us to use that information to add potential alpha."

There are other differences from traditional investments that need to be considered, such as less liquidity, lower transparency and higher fees. "Liquidity is certainly a consideration," says Raymond James' Butler. "Most alternative investments don't give clients access to their money on a daily basis. Some may lock up capital for many years. So as a first step, investors need to work with an advisor to determine their comfort with a portion of their portfolio being in less liquid assets," he says.

He also says that even though the universe of publicly registered alternative investments has exploded in recent years, access to some strategies still requires looking into private placements. "The more accessible structures aren't necessarily a panacea to the traditional net-worth limitations of most alternative investments. There will always be a subset of alternative strategies that requires less liquidity and won't be accessible in more liquid formats. The industry also has to address the fact that many managers will still be drawn to private structures that offer the potential for an incentive fee structure. Clients also need to recognize that alternative strategies in mutual funds and ETFs provide exposure to many of the same risks common to hedge funds, such as leverage, shorting and derivatives."

Because the introduction of accessible alternative investment options represents a significant change in the investment landscape, many believe it also represents a change in direction away from static buy-and-hold strategies to a more active, hybrid approach to managing client accounts. "In times of significant market crisis, correlations tend to become less negative," says Butler. "Advisors need to monitor those correlation changes to maintain truly diversified portfolios."

Dee Jernigan, a financial advisor with Midsouth Bank in Murfreesboro, Tenn., has been using alternatives for several years to help mitigate risk. "Part of the due diligence process is to continually examine the correlations and how they change over time. I think you end up with a combination of strategic and tactical strategies. The two work quite well together and a lot of the tactical management that you see is applied to the alternative sleeve of your portfolio. The tactical element isn't based on market returns, but rather on changing correlations."

Barrato hopes that more advisors will take the initiative to learn more about alternatives and begin to incorporate them into their client's portfolios. "The bulk of alternative assets are still managed by only a handful of advisors... It's better for investors and therefore better for ourselves and our industry if we educate ourselves about how these investments can be used to reduce portfolio volatility." He says advisors need to use some kind of alternative investment as a hedge against a broad market downturn.

But that presents another challenge: how much should be allocated to alternatives? "It's not uncommon for a purely mathematical optimizer to recommend an extremely high allocation to alternatives," says Butler. "But there needs to be a practical overlay. That's why I'd argue the approach should start with the needs of the clients and any constraints they may have," he says.

While the optimum allocation depends on the client's specific circumstances, Spelman says many of the advisors she talks to are allocating anywhere from 20% to 25% of their clients' portfolios to a variety of alternative strategies.

Jernigan believes the mainstreaming of alternative investments represents a simple evolution of the advisor's basic role. "Our role is the same as it was 30 years ago, but the nuances of what we do on daily basis evolve. And this is just another step in that evolution."

Keith J. Weber founded the Weber Consulting Group, an advisor training, coaching and practice management firm in Fort Collins, Colo.