For example, in 2009, the firm started thinking about distressed debt. Notwithstanding the overhang of earlier deals, most of the new plays in that space were going to be fundamentally different in their covenants and restrictions, he says. "So it was going to be a very different kind of distressed debt cycle, very prolonged, and it was very important for distressed debt investors to be able to guide [the target companies] along through the bankruptcy process." Which meant the space was going to look more like private equity, in his view. His logic was that there were a hundred firms that could trade distressed bonds, but few with the expertise to actually go in and manage the distressed companies. That made the weeding process easier. "You're down to two or three, and as far as I'm concerned, they're all good."

Commonwealth
Boston/San Diego
Brad McMillan, Chief Investment Officer
Fred DeBaets, Senior Fixed Income Analyst
Jim McAllister, Senior Investment
Research Analyst
Brian Price, Director, Asset Management
Simon Heslop, Vice President,
Asset Management

Brad McMillan restructured the team at independent broker-dealer Commonwealth five years ago to integrate the research department and alternative investments departments, reforming them into groups of core strategies, alternative financial strategies and real assets.

In a world of risk-on/risk-off investing where even the price of agricultural commodities and the S&P 500 can move the same way, when volatility is influencing people's perceptions, McMillan says there's a greater place for alternative investments.
"You are seeing an increase in correlations driven by this enormous tidal wave of cash flowing back and forth," he says. "The problem has gotten worse as different retail-level vehicles have been created to allow retail investors access to asset classes that previously they couldn't get access to. Some of the ETFs for commodities, for example. That's led to an enormous influx of cash into these markets."

In this kind of environment, McMillan says he's generally pessimistic about stocks and he believes bonds haven't played out yet (rumors about their demise being highly exaggerated). He says it's important to be aware of the environment, something his team is trying to make advisor clients aware of, though it doesn't impose any strategy on them. He also says the concept of diversification needs to mature.

"Before, diversification meant you had several different growth stocks and maybe some bonds you were diversified from A to B. That's not really how it works anymore; you now have to diversify not just among asset classes, but also strategies within those asset classes. And you need to understand where diversification will be coming from going forward." It used to be that you could look back in the past and say that two different securities behaved different, but that's not the case anymore. And that means there's a need to incorporate more alternative strategies within a wider range of portfolios. "I was actually brought in six years ago as director of alternative investments specifically to start doing that," he says.

Morgan Stanley
Purchase, N.Y.
Sukru Saman, Head of Due Diligence, Investment Products, Mutual Fund and ETF

"Primarily we evaluate mutual funds and ETFs," Sukru Saman says of Morgan Stanley Smith Barney's team. "Basically we look at two different angles before we get comfortable. First thing, we're looking at the track record and the tenure of the PM team, as well as the total assets under management. We do look at the investment strategy and we make sure there is a clear and viable investment process behind the product where the investment objective of the fund is clearly achieved by the investment process."

Sukru says the team also takes a closer look whenever there are derivatives, shorting or leverage involved in a strategy-"any unusual signs that the investment process is not fully in line with the investment objective, that will be a signal to us to turn off the fund, if there is a significant amount of risk-taking within the fund or any significant amount of leverage, it will definitely be a turning point."

The team will only look at funds with at least $25 million in assets and a six-month track record.  
The team's biggest challenge? "In this market, probably the volatility."

RegentAtlantic Capital
Morristown, N.J.
Chris Cordaro, CEO and CIO

Chris Cordaro was once considering a new mutual fund to add at his firm, RegentAtlantic. The firm uses a rigorous quantitative process to weed unsightly tares out of the vineyard. But then the firm has to have a good feeling about the managers as well. He was interviewing a manager whose fund had passed all the screens with flying colors. "But then when we were interviewing the manager [we] just asked a simple question, 'Where do you get your ideas from?' He said, 'Well, he took his son to the mall and he really liked some specific store.' Well, how is that reproducible? What happens when your son goes to college or no longer likes that Abercrombie & Fitch? Everything else lined up perfectly, but once the investment committee heard that ... next!"

RegentAtlantic is all about the warts and all quantitative data, he says-finding out what's cheap and weeding out things that the rest of the world might be going gaga over.