A product that is complex for many
Alternative funds may be intriguing, but advisers urge caution, as it is hard to distinguish the skilled money managers from the lucky ones
Add BT as a preferred sourceTHE sales pitches go something like this: A mutual fund that promises to zig when the rest of the stock market zags. Bond funds that protect investors when interest rates rise. Access to the most sophisticated hedge fund managers in the country, even if you're not particularly wealthy. Many investors and their financial advisers have been lured into these alternative mutual funds, which use an array of complex investment strategies meant to protect clients against steep market declines, for instance, or hedge against interest rate movements. Billions of dollars have poured into these funds during the economic uncertainty of recent years, and total assets, which stand at US$234 billion, are up nearly 33 per cent from 2012.
It's easy to understand why the average investor might be intrigued. Alternatives offer a way to further diversify a portfolio, adding in another layer of protection against market volatility. Long/short equity funds, for instance, which try to minimise an investor's losses by anticipating whether stocks will rise or fall, dropped 15.4 per cent when the market plummeted in 2008, according to Morningstar. That compares with the 37 per cent loss logged by the Standard & Poor's 500-stock index.
And there are plenty of smart financial planners - even those who don't profit on their investment recommendations - who put anywhere from 3 to 15 per cent (or more) of their clients' portfolios into alternative funds.
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