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4 Alternative Funds Win Medalist Rating: Morningstar

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Investors have plenty of questions about alternative-strategy funds, as do advisors.

Fund-research firm Morningstar has been reviewing them since the fall and recently added a group of these funds to its Medalist Analyst Ratings list.

“That’s not an easy bar to clear, as when it comes to alternatives, we tend to view new funds with a skeptical eye. They’re often overpriced, and frequently the strategies, while intriguing, are untested or lack transparency,” said Josh Charlson, CFA, in a report on Tuesday.

The funds Charlson and his colleagues reviewed come from four categories: market neutral, long-short equity, option-writing, and multi-alternative.

Morningstar says the funds it recently gave Bronze status to are run by experienced management teams “with specialized expertise” guiding the strategies that power these funds.

“Given the complexity and technical difficulty of executing many alternatives strategies, veteran and accomplished management is critical,” Charlson said.

4 Bronze-Rated Additions

1. The American Century Alternatives Market Neutral Value (ACVQX)

The Morningstar-rated fund is led by veteran value manager Phil Davidson, who follows the same fundamental stock-picking process for this fund as he uses for his long-only value strategies.

The fund, launched in October 2011, relies on pair trades, which involves buying one company while going short another; both are highly correlated and have temporary price dislocations.

“The team works from a limited pool of about 500 companies that meet its quality criteria, rather than attempting to short the junkiest stocks,” Charlson explained.

Its strategy emphasizes fundamentals vs. quantitative models and has maintained a beta to the S&P 500 of close to zero over the past three years, while also hitting its target of 3% to 4% returns a year.

2. Abbey Capital Future Strategy (ABYIX) 

This mutual fund is managed in Ireland by a firm that has been running managed-futures strategies in private fund formats since 2000; it has $2.7 billion under management and uses a multi-manager approach that includes external subadvisors.

The fund is led by Tony Gannon and Mick Swift.

“Unlike some managed-futures peers, this fund is not a pure trend-follower. It aims to produce a return stream uncorrelated to stocks or bonds by allocating 60% of its assets to systematic trend-following subadvisors and 40% to diversifying strategies such as short-term trading, systematic macro, and/or relative value,” the Morningstar analyst says.

This strategy helps the fund be more resilient when there are few trends to track. Its fees are above average, but Abbey Capital “is transparent with its fee structure and does not include performance or swap fees,” the Morningstar analyst says.

3. JPMorgan Hedged Equity (JHQAX)

This fund is part of the option-writing category, a new alternatives category created by Morningstar in 2016.

Managers Hamilton Reiner and Raffaele Zingone run the fund via a long-equity portfolio that replicates the S&P 500 and “collar that portfolio with an option overlay,” according to Charlson.

However, the fund differs from a typical collar strategy, which involves selling calls and buying puts against a long equity position, he adds.

Instead, the JPMorgan Hedged Equity fund constructs a put spread by buying puts at one strike price and selling them further out of the money. This strategy aims to protect the fund from market sell-offs in the range of negative 5% to 20%.

“However, the fund could be exposed to bigger losses if the market were to drop further than 20% in a severe crash,” the analyst pointed out.

Under normal circumstances, however, it should perform like a 60/40 balanced portfolio.

“Reiner’s extensive experience with options and derivatives is a plus, as are the fund’s competitive fees, which are 0.85% for its A shares,” according to Morningstar.

4. Boston Partners Global Long/Short (BGRSX)

Boston Partners is one of Morningstar’s “favorite alternatives firms,” because of its focus and successful approach — fundamental long-short equity investing with longs and shorts producing alpha.

The fund managers also focus on preserving return potential by closing funds “before they become bloated.”

The Boston Partners Global Long/Short got its start in January 2014.

It follows the same approach as the group’s flagship Boston Partners Long/Short Research Fund (BPIRX), which is a Silver-rated fund closed to new investors.

While CIO Jay Feeney is its official manager, day-to-day managers are Chris Hart and Josh Jones. Plus, three other dedicated analysts work on the fund.

(The firm uses a “three circle” approach: valuation, business fundamentals and business momentum.)

The fund allocates about 50% of assets to non-U.S. stocks and keeps a 100% static long exposure with a fluctuating short exposure of 30% to 70%. The average net long exposure is 40%.

“Expenses are above average — an issue with most of the Boston Partners long-short funds—but few liquid alts firms have performed as consistently as this one,” said Charlson.


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