Contrarians might want to look hard at alternative investments.

Thanks to what seems like a never-ending bull market, flows into various alternative funds have dried up over the last four years, said Cleo Chang, senior vice president and head of alternatives for American Century.

“There’s a lot of complacency out there,” Chang said Monday during a panel discussion at Financial Advisor magazine’s Inside Alternatives conference in Denver.

Meanwhile, yields on traditional bonds are down, and durations up, on the Barclays US Aggregate bond index.

“The yield per unit of duration is at an all-time low,” said Jack Chee, a senior research analyst and a principal at Litman Gregory. When rates were higher, a drop in bond prices could be made up in a relatively short period of time, but “now a 50 basis-point drop [in rates] wipes out more than a year of yield,” he said. Given that, bonds may not offer as much protection in a bear equity market.

Panelists expressed some frustrations at the difficult search for yields, without taking undue risk.

There are no “fat pitches” in fixed income now, Chee said, so “allocate to alternatives carefully.”

“If you get greedy, you may not be aware of the risk,” Chang said, noting the liquidity risks that may not be obvious with a bond fund or ETF. “Bank loans take two weeks to settle in a best-case scenario,” she said.

David Wright, managing director and co-founder of Sierra Investment Management, warned that many alternative income funds won’t hold up in a bear market. Sierra Investments looked at past returns from 54 non-traditional bond funds and found that 47 of those funds had a negative correlation to traditional bonds and a positive correlation to equities.

“You have to look beyond the label” to make sure a bond fund will behave like bonds, he said.

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