Amidst the market carnage, liquid alt funds lived up to their promise

Diversifying beyond a single fund or single strategy is key

Jan 11, 2016 @ 1:29 pm

By Jeff Benjamin

+ Zoom

While most investors and financial advisers might still be trying to shake off the shock of the stock market's historically-bad opening week, the true-believers in alternative investments are almost gloating.

“We've been using managed futures funds as an indirect hedge, because they're structured for this kind of environment,” said Bradley Alford, chief investment officer at Alpha Capital Management.

Both of the alternative-strategy funds of mutual funds that Mr. Alford runs put up positive returns last week, while the S&P 500 Index fell by 6%.

The gains of 10 basis points for Alpha Opportunistic Alternatives Fund (APOCX) and 65 basis points for Alpha Defensive Alternatives Fund (ACDEX) might be slight, but are still a full six percentage points ahead of the broader equity markets.

Mr. Alford relies on select trend-following managed futures funds that tend to shine in extreme market environments, such as a surging U.S. dollar, falling oil prices and stock market pullbacks.

Specifically he uses AQR Managed Futures Strategy Fund (AQMIX), which gained 1.57% last week, and Abbey Capital Futures Strategy Fund (ABYIX), which gained 1.24% last week.

He refers to such strategies as indirect hedges, as opposed to the more specific direct hedges of something like the Grizzly Short Fund (GRZZX), which gained 8.45% last week.

Mr. Alford also holds the Grizzly fund in his portfolio of funds, but doesn't recommend investors take such a “rifle shot approach” in terms of a big bet with that kind of directional short fund.

As a broad category, managed futures funds gained 1.21% last week, which is better than all but four of the more than 90 fund categories tracked by Morningstar.

The long government bond category gained 1.84%, commodity precious metals gained 4.3%, equity precious metals gained 4.46%, and bear market funds gained 10.82%.

Dick Pfister founder and chief executive of AlphaCore Capital, includes managed futures funds along with global macro funds as tools for navigating what he describes as divergent markets.

“When the fundamentals are thrown out the window you want divergent strategies that will do well when a lot of other more traditional alternative strategies won't do well,” he said.

Strategies that identify and capitalize on trends in currencies, commodities, interest rates and stocks are completely agnostic to the direction of the trades, he explained.

“What happened during the first week of the year was similar to the subprime mortgage crisis, and the junk-bond collapse,” Mr. Pfister said.

Divergent strategies are different from convergent strategies, such as long-short equity, which might go long undervalued stocks and go short overvalued stocks.

“Most long-short managers are net long between 20% and 70%, and that will not do well when the fundamentals are thrown out the window,” said Mr. Pfister, who started adding managed futures funds to his clients' portfolios in early 2015.

Mr. Pfister, who constructs portfolios that are as much as 50% allocated to alternative-strategy mutual funds, blends divergent and convergent strategies alongside traditional stock and bond portfolios.

Last week when the S&P was down 6% and the MSCI was down 6.5%, Mr. Pfister's balanced alternative portfolio was up 40 basis points.

The AlphaCore portfolio that includes traditional stocks and bonds alongside a heavy allocation to alternative-strategy mutual funds was down 88 basis points last week, which compares to a 3.14 drop for a globally diversified portfolio of 60% stocks and 40% bonds.

“Long-short equity, market neutral and relative value are the three primary strategies that will do well in a convergent market, when fundamentals are making sense,' Mr. Pfister said. “But the divergent strategies are for when there's panic and hysteria, but you never know exactly when that will happen, which is why you want both of those types of strategies in a portfolio.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 31

Conference

Spring Excell—Peak Advisor Alliance

Members of the InvestmentNews Research team will be presenting new adviser benchmarking data and providing strategies that can help accelerate the growth of your business. In this exclusive three-hour workshop, InvestmentNews will... Learn more

Featured video

INTV

Calvert's John Streur: How the Trump administration will impact socially responsible investing

President Donald J. Trump's environmental policies have inspired socially responsible investors to take action, according to John Streur, president and CEO of Calvert Research and Management. But the policies could have negative long-term effects.

Latest news & opinion

Wells Fargo's move to boost signing bonuses could give it a lift

Wirehouse is seen as trying to shore up adviser ranks that took a hit after banking scandal

New Jersey fines David Lerner Associates for nontraded REIT sales

Firm will pay $650,000 for suitability, compliance and books and records violations.

Report predicts $400 trillion retirement savings gap by 2050

Shortfall driven by longer life spans and disappointing investment returns.

Wells Fargo will ramp up spending to lure brokers

Wirehouse, after losing 400 brokers in first quarter, is bucking trend among rivals who have said they are going to cut back on spending big bucks recruiting veteran advisers

DOL fiduciary rule pushes indexed annuity carriers to develop new products

Insurers are introducing fixed-rate deferred annuities with income guarantees to circumvent BICE.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print