During the past few years, much as been written (some of it by me) about the advantages of alternative investments in client portfolios. Apparently, advisors and the public have been listening. According to Morningstar, in 2007 alternative mutual funds brought in only $2.8 billion; by 2010, inflows had grown six-fold to $18.8 billion.
The reasons behind this meteoric success aren’t hard to figure: during the decade ending March 31, 2010, the S&P 500 Index (total return) was down 6.36%, or 0.66% per year, while hedge funds (as measured by the HFRI Fund Weighted Composite Index) were up 77%, or 5.9% a year, and managed futures mutual funds (as measured by the Altegris 40 Index) were up 115%, or 8.0% annually.
What’s more, non-correlated alternative funds are well suited to allocated portfolios: From January 1997 to Jan 2012, Managed futures had a -0.15 negative correlation to the S&P. During this same period, the S&P had an annualized standard deviation of 16.5% vs. 10.5% for managed futures and 6.1% for Global Macro funds, all of which can reduce portfolio risk dramatically.
Another reason for alternative funds’ recent success is that in recent years, hedge fund managers have warmed to the mutual fund format. “Many hedge fund managers who wouldn’t have considered this before, are doing it today,” said Jon Sundt (left), president and CEO of Altegris Advisors, which manages some $3.4 billion in alternative funds. “Some hedge funds showed massive redemptions. And there’s been fee compression; Hedge fund managers who used to get 1% plus 20% of their gains, are now willing to work for a flat fee. Also, after the credit crisis, long/short managers are using lower leverage: less than two to one, which is required by mutual funds.”