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Alternative Investments Are the New Mainstream

June 18, 2009 • Page 2 of 2

Even investors in "conservative" allocation mutual funds lost money. Target-date mutual funds designed for people retired or planning to retire in 2000-2010 are down over 20% in one-year returns. College savings plans lost money. This is hard-earned and saved money that investors counted on to live and fund pertinent expenses.

Of course, as risk averse as everyone seems to be these days, how can we be so sure that alternative investments will go mainstream?

One sure sign of their growing acceptance-and significance-is that Morningstar has finally given them a mutual fund category. Before, Morningstar grouped mutual funds under the traditional asset classes: U.S. stocks, international stocks, taxable bonds, municipal bonds and "balanced" funds. Today, Morningstar recognizes and rates mutual funds investing in assets with "little to no correlation" with traditional stocks and bonds. This includes currency, long-short, precious metals and bear-market mutual funds.

For advisors, this is good news. Hedge funds have typically represented the biggest portion of alternative investments. But last year, many high-net-worth investors were rightly nervous about sticking with hedge funds after two Bear Stearns hedge funds collapsed due to losses on mortgage-backed securities. By contrast, mutual funds are accessible, transparent and regulated in a way that most retail investors can be comfortable with.

For now, it is mostly the smaller players leading the way. Sierra Core Retirement Fund (SIRAX), Autopilot Managed Growth (AUTOX), Palantir Fund (PALIX) and Arrow Alternative Solutions (ASFFX) are just a few of the examples of alternative products we have helped launch and that are at the forefront of this drive to bring Harvard-like results to the average retail investor, no matter the market.

In the future, I suspect it won't be long before the bigger guys catch on.

Andrew Rogers is president of Gemini Fund Services, LLC, in Hauppaguge, N.Y. Gemini provides back-office services for advisors who are launching or managing mutual funds. He has over 16 years of experience in the mutual fund industry.

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7 Comments

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mcgriff016 14 years ago

Ryan, I am very familiar with Managed Futures--have used them for years. Got my Series 31 back in 1997. I should have added them to my very brief list of 2nd half outperformers!
rdconsult 14 years ago

alternatives shouldnt be lumped together

the term alternatives doesn't mean a thing. Most alternatives do have beta during periods of market stress. But Mcgriff, short term treasuries and precious metals werent the best performers. in fact even gold had extremely high beta during certain periods. The one alternative that did hold up, in fact experienced exceptional returns, was managed futures - more specifically trend based managers. Yet it seems as though very few RIA's are familiar with this space. Ryan
clebeau2 14 years ago

The former manager of the Harvard endowment, Mohamed El-Erian recently stated, "Diversification alone is no longer sufficient to temper risk. In the past year, we saw virtually every asset class hammered. You need something more to manage risk well."
14 years ago

Pure alternatives that were positive last year

Agreed, the article is misleading because of the fiscal year end date of Harvard (June 2008) - however, there are a number of "pure alternative" investment strategies that we have identified and researched that were positive throughout all of last year. My firm specializes in this kind of research. We then use these "pure alternative" strategies as building blocks for our clients. Most of these strategies that we have identified were even positive every single month through all of last year and also through this year. I can show you our research if you want, you'll see what I mean. These are not strategies investing in the public markets and have nothing to do with stocks, bonds, RE or any traditional asset clases.Keith Averillwww.TopTierManagers.com775-852-9449
14 years ago

Nice call david as to the date of their fiscal year, they were down for 2008. McGriff you are right, 2008 had most asset classes correlating to the downside, and history shows that this isn't a rare event just fortunately not common. In such a situation, the only options are getting out or carefully trading the inverse ETFs (this allowed me to finish the year last year up a very small percentage). Alternative investments should have provided better protection than they did last year, but it turned out a lot of them were beta players in disguise. The problem is that this bear market may not be over and not only is it possible that we go down to the lows in March, we may go lower. Throwing some numbers out there, 450 on the SP would be a PE of 8x earnings which is the high end of PEs at bottoms. SP at 400 would translate to a PE of 7x earnings. SP of 300 would not be out of the question yielding a PE of 5x earnings (that is not a black swan event as we have reached PE of 5 in previous lows over the years). Anyway, this isn't to scare anyone, just that anyone managing money in this environment needs to have a plan in place to protect clients from loss in case the market drops but also to capture upside in case the market doesn't. Definitely not an easy task. Then throw some extra regulation on top of all of this (that will probably only serve to hassle the honest advisor and aid the crooks) and our jobs as advisors couldn't possibly be more difficult. Suzanne
[email protected] 14 years ago

Harvard Endowment was a big loser in 2008

Wow, the lead in this article is quite misleading (and self serving). Yes, Harvard made 8.6% for their 2008 fiscal year (which ends in June 2008). But by the end of the calendar year the Harvard endowment had [b]lost 22%[/b]. So much for alternatives saving their bacon.
mcgriff016 14 years ago

This article is extremely misleading. Harvard's 2008 fiscal year ended June 30, 2008. At that point, virtually all the alt-investments were working. We all know what happened next.Unless they went 100% Precious Metals and Short Term Treasurys, they were down dramatically for the 2nd half of the year. I'd be shocked if they didn't end calendar 2008 down double digits.Alternative investments fit in nearly every portfolio, but last year's black swan market left no one, even the smart Ivy guys, unscathed.