Alternative-investment strategies can benefit client portfolios. But some managers’ high minimums restrict access for smaller investors.
That restriction has led to the emergence of mutual funds that invest with alternative-strategy managers — with lower account minimums.
A logical progression for fund providers was to create multi-manager funds.
These funds increase diversification by allocating assets among managers and strategies. Investors apparently find this approach attractive.
According to Morningstar data, 17 multi-alternative funds launched in 2012. Plus, the category’s growth has been strong in early 2013: Assets in multi-alternative open-end funds grew from $17.97 billion in January to $20.11 billion by April 30, the Chicago-based research group says.
Jeremy DeGroot (left), chief investment officer of Litman Gregory Asset Management in Orinda, Calif. (near San Francisco) and manager of the Litman Gregory Masters Alternative Strategies Fund recently shared his insights on alternatives with ThinkAdvisor.
The Litman Gregory fund (MASFX, MASNX) has $587 million in assets allocated across four mangers and strategies: Loomis Sayles (strategic-alpha fixed income); Water Island Capital (arbitrage strategy); DoubleLine (opportunistic income) and FPA (contrarian opportunity).
Why did you selecting these managers and strategies?
The selection of managers and strategies was driven by what we are trying to accomplish with this fund.
First, obviously we wanted highly skilled managers who we strongly believed have the ability to add significant alpha over time and generate strong risk-adjusted returns.
And we wanted strategies that would be complementary and provide diversity to the overall fund portfolio.
Finally, fees were important since our objective has been to deliver a quality fund at a reasonable fee level.
Our assessment of the managers and strategies was based on our qualitative due diligence and our quantitative analysis of their track records.
Important to us was the willingness to be opportunistic from a tactical standpoint– specifically a willingness to increase or reduce risk based on their assessment of risk/reward trade-offs.
But we also wanted to create a fund that is not highly correlated with stocks and bonds, and that we believe would be relatively low risk compared to stocks and also on an absolute basis in terms of downside performance. Both of these objectives are very important.
We didn’t want a low-risk fund that wouldn’t have the potential to generate much return or, conversely, a fund that would turn out to be too volatile.
With respect to risk management we sought to hire managers who met two criteria: First, they each would have a different investment approach and/or investment universe that collectively would result in a portfolio that we believed would not be highly correlated to the stock market and the bond market and would have a low equity beta.
Second, we were only interested in managers who we believed would run a low risk portfolio by virtue of their investment approach or investment universe, and/or because of their risk mindset.
And at the overall fund portfolio level, we wanted a mix of managers and strategies that we did not believe would be highly correlated with each other.
How has the fund performed to date?