It’s something that a lot of investors are looking for but seems so elusive. Something different. Something more stable. Something that won’t keep us up at night. A lot of investors have moved from the traditional roller coaster ride of the Markets to the world of ETF‘s and Alternative Funds. Many will never look back.
In these tough times, investors want alternatives to traditional asset classes that are now so disappointing — investments that will zig while everything else is zagging.
“Alternative” funds aim to deliver consistently positive returns by eliminating or substantially reducing market risk. It’s such a compelling pitch for investors seeking havens from recent market volatility that Lipper, a Thomson Reuters company, says assets in these funds have grown almost 125 percent in the last three years to $531 billion.
“That’s astounding, especially when you consider that $249 billion — almost 85 percent of that growth — is inflows from investors, not performance,” says Matthew Lemieux, a Lipper research analyst. The number of alternative mutual funds and ETFs has doubled since the end of 2008, to 289 and 427 respectively, Morningstar, another fund tracker, says.
Clearly, alternatives are hot. But what exactly are they? If you don’t know, you have plenty of company. A recent survey of investors by Natixis Global Asset Management found 70 percent understood alternatives “only a little” or “not well at all.” More than two out of five had no idea what alternatives are.
Your adviser may not know, either. In a recent InvestmentNews survey, 52 percent of financial advisers said they don’t feel as knowledgeable about alternatives as they’d like to be — yet 88 percent are using them in client portfolios.
So, what is an alternative asset? It’s anything that isn’t a stock, bond or cash, which means that real estate, gold and commodities are all alternatives. When you buy an “alternative” mutual fund, you’re not actually buying an asset class, but rather a strategy — in fact, multiple strategies that are typically used by hedge funds.
These funds invest in a broad range of asset classes and derivatives (financial contracts whose value is based on the value of other instruments, such as stocks, bonds, currencies, or market indexes). And they don’t just buy assets they like; they also bet against those they think will perform poorly with short sales.
Morningstar has grouped alternative mutual funds into six categories: Currency, Market Neutral, Multialternative, Managed Futures, Long/Short Equity, and Bear Market.
A few things to consider before opting for alternatives:
As always, you need to do your own research in this market to determine if it’s really right for you. Just because investors added $249 Billion to these investments within the last few years doesn’t mean that they are without some kind of risk also.
Filed under: Business