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Are Alternative Investments the Right Alternative for You?


Alternative investments are all the rage these days.  Mutual fund companies are falling all over themselves to sell financial advisors and their clients on “liquid alts” or hedge fund-like strategies with the daily liquidity offered in a mutual fund wrapper.  Hedge funds were allowed to advertise due to a change in the rules last year.  The financial press is filled with articles about alternatives and the fund companies are offering numerous webinars and conferences covering them.

Are alternative investment strategies right for your portfolio?  I have no idea but here are some questions to ask as well as some information for you to consider.

What is an alternative investment strategy?

Alternatives are basically investment vehicles that aren’t purely stocks, bonds, or cash. The purpose of alternatives is generally to diversify an investment portfolio.  Ideally these strategies will have a low correlation to other investment vehicles in your portfolio.  Examples of alternative strategies include:

  • Hedge funds
  • Unconstrained fixed income
  • Macro strategy funds
  • Commodities and managed futures
  • Real estate
  • Precious metals
  • Long/short equity
  • Convertible arbitrage
  • Private equity
  • Vulture funds
  • Venture funds
  • Merger arbitrage 

As mentioned above, these strategies are available in the more traditional hedge fund format, as mutual funds, ETFs, and as fund of funds in each of these formats.

Consider this before investing in alternatives 

Before buying an alternative fund or product here are a few questions to consider:

  • Do you understand the underlying investment strategy?
  • What benefit will this investment provide to your overall portfolio?  Reduced volatility?  Low correlation to other holdings?
  • What are the expenses? Are they justified given the expected benefit of investing in this alterative fund?
  • Are there any restrictions on redeeming your investment? Typically (but not always) with a mutual fund or ETF the answer is no, hedge funds may have a lockup period or other restrictions.
  • Have this fund’s performance been tested in real market conditions or just back-tested on a computer?
  • Who’s managing the fund?  What is their background and track record? 

I am actually a fan of alternatives and have used several mutual funds of this type for a number of years.

Remember though, large endowments like those of the Ivy League schools use alternative investments extensively and successfully.  Unlike you they have access to the expertise needed to perform proper due diligence. Does the financial advisor recommending these funds to you really understand them? Be sure that you do before investing in any alternative investment product.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital  to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

Prognosticators or Product Sellers?


PIMco’s Bill Gross is arguably the best bond manager around and a really smart guy.  He and several of his PIMco colleagues are also master salesmen, just witness the number of appearances on CNBC and how often they are quoted in the financial press.  In the interest of full disclosure I have a fair amount of client assets invested with PIMco.

CNBC.com - 1996

In his August investment outlook letter, Gross proclaimed “… the cult of equity is dying.”  As we’ve come to expect, Gross lays out a very logical case to support his argument and he also says that the bond returns that we’ve seen over the past 30 years are unlikely to be replicated into the future as well.

At the end of the day this is a stroke of genius on many levels.  First it’s controversial and gets people writing and talking about Gross and PIMco.   Second, even with a new push into equities, PIMco is a bond shop.  I can’t help but think that anytime Gross talks down equities there is some motive, conscious or otherwise, to push PIMco’s fixed income products.

Josh Brown in his excellent blog The Reformed Broker recently wrote a post calling out Morgan Creek CEO and CIO Mark Yusko for predicting flat returns for equities over the next 9-10 years and conveniently suggesting alternative investments as the only way for financial advisors to achieve the types of returns their clients expect over this time horizon.

Morgan Creek is in the alternative investments business, and while I’m sure Mr. Yusko is a very bright guy, let’s face it this is just another thinly veiled sales pitch, aimed at financial advisors, for what his firm is selling.

The list goes on and on.  Except during the duration of the Olympics, I generally have CNBC on in the background during the business day.  Many of the guests function in the same fashion.  “Equities are the place to be” might be the mantra of a growth stock mutual fund manager.  The manager of a commodities fund might be predicting inflation into the future and touting commodities as a way to hedge against it.

Look I’m not saying any of these folks are bad people and don’t know what they are doing.  Whether you are a money manager or a financial advisor, you have to engage in sales and marketing in order to attract clients.  Financial advice is a business like any other in that respect.

As a financial advisor whose clients count on me to recommend financial strategies and the products to implement those strategies, I’ve learned to be an intent, but detached listener of pitches.  I attend several conferences throughout the year and listen in on any number of webinars and conference calls on a regular basis.  Many of these are sponsored and presented by financial services providers.   Generally there is much good information presented, but one always has to listen with a critical ear.

As always, please feel free to contact me with any financial planning questions or concerns you may have.

Photo credit:  Wikipedia

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