Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
A Buffett Rule: I live by, UNLESS I understand a company or a mutual fund (manager) I don't go there...Why? More money (returns) I doubt it paraphrase: if you can't Identify the Idiot in the room (investment room) its you!
I am educating myself on the subject. I'll never be an expert though. In my portfolio I categorize them as alternatives. Too many different ways they can invest.
This is totally Cray Cray: “Over 60% of investors aren’t quite sure what a liquid alternative is, but over 50% would buy it if their [financial adviser] would recommend it ... ”
Oh, and let me complete the math: 100% of the managers of liquid alternative funds will pay themselves handsomely with generous management fees.
Sorry, but I have yet to see any objective evidence that common investors must own alternative funds as part of a diversified portfolio.
The headline seems a bit misleading. Article castigates alternative mutual funds. I'd agree with that assessment. Because "alternative" funds vary so greatly in holdings and approach, as a broad investment class they're pretty much impossible to understand (except from a marketing standpoint).
Even when looking at individual funds here (HSGFX, MFLDX, CVSIX, etc.) the prospectus usually gives the manager so much discretion per holdings and strategy that they are very difficult to understand, and their direction can change on a whim.
As for "alternative" asset classes, I don't think there's one generally accepted definition. Often mentioned alternatives (to more traditional stock and bond investments) include: gold and precious metals, art, real estate, junk bonds, zero coupon bonds, short positions and various derivative instruments.
Are alternatives an asset class? As a whole, it would be hard to classify them as such because the area encompassed is so broad. However, some individual ones (ie real estate or precious metals ) may be considered to be an asset class by the investor.
Are they understandable? Here I think Maurice doeth protest too much. Some people DO find certain of these alternative asset classes understandable. (I'm sure he has a good grasp of many.) It's when mutual fund sales departments or pundits like M. Rieker lump them all together that they become indecipherable.
To me, alternative funds invest on a idea or a strategy rather than beating a benchmark. Ideas like low volatility, go anywhere, etc. Standard funds are described as growth, growth and income, etc which are defined goals usually tied to a benchmark like a index.
alternatives could be thought of along the same line as traditional asset classes -- not a separate asset class. for example, you have publicly traded equities and you can have privately traded equities (wouldn't be a liquid alternative, but an alternative nonetheless); you can have a public REIT or a private one (same story with liquidity); or a generic high-yield fund vs a distressed debt fund (which could be either liquid or illiquid).
if one thinks of his/her equity allocation, one gets either pure beta or beta +/- alpha, but in any event a, more or less, market (i.e. bench-marked) return.. to diversify, one can add to his/her equity allocation an equity manager who also uses shorting -- long/short, market-neutral, merger arb, etc. this way a portion of the overall equity allocation will have less correlation to pure beta. same would be true for the fixed income part of the portfolio. all IG bonds correlate with barclays agg for example, and then one selects the desired duration and credit exposure. there are however 'alternative' fixed income funds that provide different risk profile than pure interest rate exposure. those that invest in non-agency mortgages or debt of distressed companies would be 'alternatives' in the fixed income arena. then there are other non-correlated strategies such as global macro, convertible arbitrage or managed futures programs, some of which are also presentable in a liquid form.
and alternative funds do cost more. they require a prime brokerage or extensive derivative set up to short (and pay the short interest and dividends) and, in the fixed income arena, the manager does a lot of credit work - so solid staff and data access is paramount.
so alts do provide diversification from the traditional benchmark exposure. they don't promise the world and they don't look good in the record setting equity market, but they do have a place in a diversified portfolio and many have come to realize this, hence the supply.
It seems to me that they are a more diverse and potentially complex version of the old-fashioned allocation or "balanced" funds, which are not really a separate asset class but rather a blend of other asset classes.
The basic concept has been extended to allow various combinations of assets and investment styles to be mixed together in differing proportions. It would seem to me that this suggests that, other than a broad common descriptive term, they have the potential to be very different animals, even among themselves, depending upon who is running them.
>>>Even when looking at individual funds here (HSGFX, MFLDX, CVSIX, etc.) the prospectus usually gives the manager so much discretion per holdings and strategy that they are very difficult to understand, and their direction can change on a whim.<<<
Three dog funds when compared to the S&P over the past many, many years. I didn't read the article but isn't the only reason these funds came into vogue was because of 2008? I recall a WSJ article back in the late 90s titled "Waiting Up Rich." It was about how so many investors retiring found themselves rich by merely hanging tight with S&P. Obviously I am not a fan of buy and hold but in the long run it surely beats all these alternative funds sought by scared investors worried about a replay of 2008 or worse.
"It seems to me that they are a more diverse and potentially complex version of the old-fashioned allocation or "balanced" funds, which are not really a separate asset class but rather a blend of other asset classes."
@Old_Joe , It has been said in articles I've read that these funds are the new balanced funds. That is, certain ones as there are so many flavors of alternatives.
There used to be a motto among commission-based fund salesmen (sometimes euphemistically called "advisors") that it was important to keep their clients in the dark about investing. Knowledge was the enemy of the commission-based salesmen. The more their clients understood, the more likely they were to leave and go to no-load products.
I think, in a sense (knowingly or unknowingly) fund companies play a similar game with their more exotic products. If you don't really understand what they're doing with your $$, how can you accurately assess or compare the fees being paid?
This is not the case with the various hybrid products (fund of funds) offered by Price. The fees are attractive on funds like TRRIX and RPSIX. The prospectuses and reports for each provide a clear breakdown of the various holdings. I've read (but can't verify) that on these funds Price actually throws in a small discount on their fees figuring they save money by pooling certain investors into a single fund instead of having investors divy-up their assets among a half-dozen or more individual funds.
gosh... i tried to put some explanation behind these, which got completely ignored... the post asked whether these are an asset class, by the way. just saying..
I think it is clear. If you do not understand the product, don't buy it. For many it is another way of diversifying. I've just said what @fundalarm said minus the technical aspects.
What @hank said in his add-on makes sense. There are some low volatility funds that on paper look like a good product for a retiree. We need a downturn or two to see how these really hold up.
"... if one thinks of his/her equity allocation, one gets either pure beta or beta +/- alpha, but in any event a, more or less, market (i.e. bench-marked) return.. to diversify, one can add to his/her equity allocation an equity manager who also uses shorting -- long/short, market-neutral, merger arb, etc. this way a portion of the overall equity allocation will have less correlation to pure beta. ..."
You weren't ignored fund alarm. Your answer required more digging to understand. (Perhaps it's over my feeble head, or perhaps it would have benefitted from more editing on your part.).
I see your point in the above excerpt. However, I think the point is more valid if the manager is required to stay with a single easy to understand strategy. Used to own GATEX and that fund seemed to employ a fairly consistent approach using put and call options to hedge downside risk.
But what on earth do we make of an alternative fund like HSGFX where the manager, using some "proprietary formula", decides to go aggressively long when he thinks stocks will rise or (effectively) short when he thinks stocks will fall? Where's the consistency or predictability? How does this fund lower beta any more than simply going to cash on your own?
Earlier in the year the managers of MFLDX decided to overweight commodities, energy and precious metals believing these would soon rise. Again, where's the predictability you and I need to achieve that beta lowering effect? Sounds more like a game of Spin the Bottle than a consistent investment approach. Had they decided instead to overweight tech or the S&P, the result would have been entirely different than the fund's -10% this year..
Yes, The last two funds could be considered separate "asset classes" in the same sense that a 10% wager at the tables in Vegas would be. This is not meant to denigrate either fund. Just having trouble with with the "asset class" categorization.
Thanks. Always enjoy and learn from your comments.
hi hank, manager research is the main driver of any active fund allocation -- regardless whether traditional or alternative. one either indexes, or goes with a solid manager whose style is understandable and stays with the manager during periods of under-performance (which everyone will have) unless the view of that manager has changed. again, this is true to any active fund. FAIRX is a good example. it's a(n) (extreme) illustration how long only equity manager deviates from the crowd and/or any benchmark.
when you hire a manager, read the offering documents of the vehicle. if the manager has freedom to go between asset classes and tools, you really need to believe he has a track record or at least knows what he is doing.
personally, i am not investing in any of the new liquid alternatives funds. i haven't completed my own due diligence and am yet to see how it would fit in my portfolio. i am using closed-end funds for some of the hedge fund like credit strategies as the closed end structure is not subject to capital flows and allows for more illiquid instruments. i don't think that alternatives and daily liquidity is a good fit - but that's my personal opinion. best wishes. fa
May as well travel this path going forward; the other alternative investing.
So, this mix comes down to the K.I.S.S. portfolio, eh? Below are combined returns for VTI and BND (or equivalent holdings):
---2009, + 16% ---2010, + 11.8% ---2011, + 4% (equity took a hit in July of this year) ---2012, + 10.2% ---2013, + 15.7% ---2014, + 8% (YTD)
No, these investments didn't gather the big numbers from SPY or such in 2013; nor did they get hit hard on the head in 2011. The above numbers also have a compound growth factor from 2009 that is not factored. The simple average yearly return = 11% , more or less. I don't know anyone who would poo-poo 11% a year.
Now, to really add to the confusion we have a new ETF, ALTS. It is a ETF of ETFs, just like a fund of funds, only this one is all alternative strategies. This is one I would not touch as there are too many objectives thrown in and conflicts are sure to arise.
Comments
paraphrase: if you can't Identify the Idiot in the room (investment room) its you!
“Over 60% of investors aren’t quite sure what a liquid alternative is, but over 50% would buy it if their [financial adviser] would recommend it ... ”
Oh, and let me complete the math: 100% of the managers of liquid alternative funds will pay themselves handsomely with generous management fees.
Sorry, but I have yet to see any objective evidence that common investors must own alternative funds as part of a diversified portfolio.
Kevin
Even when looking at individual funds here (HSGFX, MFLDX, CVSIX, etc.) the prospectus usually gives the manager so much discretion per holdings and strategy that they are very difficult to understand, and their direction can change on a whim.
As for "alternative" asset classes, I don't think there's one generally accepted definition. Often mentioned alternatives (to more traditional stock and bond investments) include: gold and precious metals, art, real estate, junk bonds, zero coupon bonds, short positions and various derivative instruments.
Are alternatives an asset class? As a whole, it would be hard to classify them as such because the area encompassed is so broad. However, some individual ones (ie real estate or precious metals ) may be considered to be an asset class by the investor.
Are they understandable? Here I think Maurice doeth protest too much. Some people DO find certain of these alternative asset classes understandable. (I'm sure he has a good grasp of many.) It's when mutual fund sales departments or pundits like M. Rieker lump them all together that they become indecipherable.
edited to add strategy.
if one thinks of his/her equity allocation, one gets either pure beta or beta +/- alpha, but in any event a, more or less, market (i.e. bench-marked) return.. to diversify, one can add to his/her equity allocation an equity manager who also uses shorting -- long/short, market-neutral, merger arb, etc. this way a portion of the overall equity allocation will have less correlation to pure beta. same would be true for the fixed income part of the portfolio. all IG bonds correlate with barclays agg for example, and then one selects the desired duration and credit exposure. there are however 'alternative' fixed income funds that provide different risk profile than pure interest rate exposure. those that invest in non-agency mortgages or debt of distressed companies would be 'alternatives' in the fixed income arena. then there are other non-correlated strategies such as global macro, convertible arbitrage or managed futures programs, some of which are also presentable in a liquid form.
and alternative funds do cost more. they require a prime brokerage or extensive derivative set up to short (and pay the short interest and dividends) and, in the fixed income arena, the manager does a lot of credit work - so solid staff and data access is paramount.
so alts do provide diversification from the traditional benchmark exposure. they don't promise the world and they don't look good in the record setting equity market, but they do have a place in a diversified portfolio and many have come to realize this, hence the supply.
The basic concept has been extended to allow various combinations of assets and investment styles to be mixed together in differing proportions. It would seem to me that this suggests that, other than a broad common descriptive term, they have the potential to be very different animals, even among themselves, depending upon who is running them.
Three dog funds when compared to the S&P over the past many, many years. I didn't read the article but isn't the only reason these funds came into vogue was because of 2008? I recall a WSJ article back in the late 90s titled "Waiting Up Rich." It was about how so many investors retiring found themselves rich by merely hanging tight with S&P.
Obviously I am not a fan of buy and hold but in the long run it surely beats all these alternative funds sought by scared investors worried about a replay of 2008 or worse.
@Old_Joe , It has been said in articles I've read that these funds are the new balanced funds. That is, certain ones as there are so many flavors of alternatives.
(How's that for under 80 words OJ?)
There used to be a motto among commission-based fund salesmen (sometimes euphemistically called "advisors") that it was important to keep their clients in the dark about investing. Knowledge was the enemy of the commission-based salesmen. The more their clients understood, the more likely they were to leave and go to no-load products.
I think, in a sense (knowingly or unknowingly) fund companies play a similar game with their more exotic products. If you don't really understand what they're doing with your $$, how can you accurately assess or compare the fees being paid?
This is not the case with the various hybrid products (fund of funds) offered by Price. The fees are attractive on funds like TRRIX and RPSIX. The prospectuses and reports for each provide a clear breakdown of the various holdings. I've read (but can't verify) that on these funds Price actually throws in a small discount on their fees figuring they save money by pooling certain investors into a single fund instead of having investors divy-up their assets among a half-dozen or more individual funds.
What @hank said in his add-on makes sense. There are some low volatility funds that on paper look like a good product for a retiree. We need a downturn or two to see how these really hold up.
"... if one thinks of his/her equity allocation, one gets either pure beta or beta +/- alpha, but in any event a, more or less, market (i.e. bench-marked) return.. to diversify, one can add to his/her equity allocation an equity manager who also uses shorting -- long/short, market-neutral, merger arb, etc. this way a portion of the overall equity allocation will have less correlation to pure beta. ..."
You weren't ignored fund alarm. Your answer required more digging to understand. (Perhaps it's over my feeble head, or perhaps it would have benefitted from more editing on your part.).
I see your point in the above excerpt. However, I think the point is more valid if the manager is required to stay with a single easy to understand strategy. Used to own GATEX and that fund seemed to employ a fairly consistent approach using put and call options to hedge downside risk.
But what on earth do we make of an alternative fund like HSGFX where the manager, using some "proprietary formula", decides to go aggressively long when he thinks stocks will rise or (effectively) short when he thinks stocks will fall? Where's the consistency or predictability? How does this fund lower beta any more than simply going to cash on your own?
Earlier in the year the managers of MFLDX decided to overweight commodities, energy and precious metals believing these would soon rise. Again, where's the predictability you and I need to achieve that beta lowering effect? Sounds more like a game of Spin the Bottle than a consistent investment approach. Had they decided instead to overweight tech or the S&P, the result would have been entirely different than the fund's -10% this year..
Yes, The last two funds could be considered separate "asset classes" in the same sense that a 10% wager at the tables in Vegas would be. This is not meant to denigrate either fund. Just having trouble with with the "asset class" categorization.
Thanks. Always enjoy and learn from your comments.
when you hire a manager, read the offering documents of the vehicle. if the manager has freedom to go between asset classes and tools, you really need to believe he has a track record or at least knows what he is doing.
personally, i am not investing in any of the new liquid alternatives funds. i haven't completed my own due diligence and am yet to see how it would fit in my portfolio. i am using closed-end funds for some of the hedge fund like credit strategies as the closed end structure is not subject to capital flows and allows for more illiquid instruments. i don't think that alternatives and daily liquidity is a good fit - but that's my personal opinion. best wishes. fa
So, this mix comes down to the K.I.S.S. portfolio, eh? Below are combined returns for VTI and BND (or equivalent holdings):
---2009, + 16%
---2010, + 11.8%
---2011, + 4% (equity took a hit in July of this year)
---2012, + 10.2%
---2013, + 15.7%
---2014, + 8% (YTD)
No, these investments didn't gather the big numbers from SPY or such in 2013; nor did they get hit hard on the head in 2011. The above numbers also have a compound growth factor from 2009 that is not factored. The simple average yearly return = 11% , more or less. I don't know anyone who would poo-poo 11% a year.
Take care,
Catch
http://www.marketintelligencecenter.com/articles/621014
http://www.marketstupiditycenter.com/articles/621014