It may take several more years for the cream-of-the-crop liquid-alternatives managers to emerge, but even in the early innings, these four firms are making strong cases.
BlackRock Inc.
Number of alternatives funds: six
Alternatives mutual fund assets: $4.2 billion
Fund to watch: $669 million BlackRock Emerging Markets Long/Short Equity Fund (BLSAX)
Emerging-markets stocks have always been capable of giving investors a stomachache from their roller-coaster-like swings, but BlackRock is trying to give investors a smoother ride. Since the BlackRock Emerging Markets Long/Short Equity Fund was launched in October 2011, it has accomplished that and offered significant downside protection. A $10,000 investment in the fund at its launch would be worth just under $11,000 today. A similar investment in the iShares MSCI Emerging Markets ETF (EEM) would be worth less than $10,000 today. That is because even though the long/short fund returned only 7% last year, compared with 19% for the exchange-traded fund, this year, it has managed to deliver a return of 0.49%, compared with a 13% loss for the ETF through Sept. 17, according to Morningstar Inc.
The Goldman Sachs Group Inc.
Number of alternatives funds: seven
Alternatives mutual fund assets: $13 billion
Fund to watch: $8.9 billion Goldman Sachs Strategic Income Fund (GSZAX)
Investors are freaking out about interest rates, which has led to record inflows into nontraditional bond funds with the ability to short bonds. The category is still relatively new, but the early results point to the Goldman Sachs Strategic Income Fund, which hit its three-year anniversary June 30, having the initial lead. Its three-year annualized returns rank in the top 10% of nontraditional bond funds, but this year, when rising rates have caused the Barclays U.S. Aggregate Bond Index to lose almost 3%, it's proved its merit. The fund is up 2.8% for the year, ranking it third among all nontraditional bond funds.
Pimco
Number of alternatives funds: seven
Alternatives mutual fund assets: $46.5 billion
Fund to watch: $29 billion Pimco Unconstrained Bond Fund (PUBAX)
Pacific Investment Management Co. LLC, the largest bond manager in the world, hasn't been immune to the fear that has struck investors over rates, but its solution has some catching up to do. The Pimco Unconstrained Bond Fund, managed by Chris Dialynas, uses the same investment approach as the world's largest mutual fund, the $251 billion Pimco Total Return Fund (PTTAX), but instead of being tied to a benchmark, the unconstrained bond fund, as its name suggests, is able to invest freely, as well as short. This year, though, it's lost 2.38%, better than the Pimco Total Return Fund's 3.8% loss but in the bottom quartile of nontraditional bond funds. The poor performance hasn't stopped investors from loading up on shares of the fund, though. Since May, when rates began to spike, through August, the fund averaged a little more than $1 billion in net inflows a month, according to Morningstar.
361 Capital LLC
Number of alternatives funds: three
Alternatives mutual fund assets: $435 million
Fund to watch: $427 million 361 Managed Futures Fund (AMFZX)
Unlike most managed-futures funds, the 361 Managed Futures Fund eschews commodities and long-term trends, and instead focuses on short-term countertrends in the S&P 500, Nasdaq Composite and Russell 1000 indexes using futures contracts. Basically, the fund is looking for markets that are overbought to short, or oversold to buy, over a short period of time. How short is short-term? The average trade lasts only about three days. Its unique take on trend following has paid off as traditional managed-futures funds have struggled mightily. A $10,000 investment in the fund at its December 2011 launch would be worth just under $12,000, while a comparable investment in the average managed-futures fund would have fallen to less than $9,000.
— Jason Kephart
