What makes an alternative an alternative? Don't bother asking many investors

Though few investors really grasp alternatives, portfolio managers suggest that advisers introduce them to the strategies as a diversification tactic. “Initially, it was hard to get domestic clients overseas, but using a small portion of their portfolio, you can build your position in times of weakness,” said Francisco Alzuru, manager of the Hansburger Emerging Latin America fund. He spoke yesterday at a luncheon in New York hosted by Natixis Global Asset Management. Matthew J. Eagan, co-portfolio manager of the Loomis Sayles Absolute Strategies Fund, and Michael T. Buckius, co-portfolio manager of the Gateway fund, were also at the event. A survey released yesterday by Natixis revealed that about 47% of some 463 investors said they are worried about losing money due to volatility, but at the same time, about four out of 10 of them aren't interested in alternative products and strategies. The poll was conducted in May and July, and covered investors with at least $200,000 in investible assets. A good 40% of the polled individuals have no idea what an alternative investment is. Seventy percent said they understand alternative investments “only a little” or “not well at all,” and 53% said they don't understand how they work. Sometimes those alternatives are a counterintuitive find. Mr. Alzuru noted that investors are fleeing Latin America “en masse” as they question global growth. That panic presents a great opportunity for investors who might want to jump in. He cited Latin America's growth potential, pointing to a relatively low debt burden, compared with nations in the developed world, free-floating interest rates and the fact that Latin American countries have an abundance of natural resources and a lot of demand from China and India. As for getting over the anxiety of investing in Latin America, Mr. Alzuru pointed out that at some point, “the majority of the globe will realize that most of the output comes from emerging markets.” Mr. Eagan agrees. “We should be more outwardly looking in order to protect purchasing power,” he said. Though Mr. Eagan's fund is a fixed-income product, it is different from a typically core bond portfolio — and features a low correlation to other bond funds. “It's not a high-yield fund, but it's slightly more risky than a core portfolio,” he said. The Absolute Strategies Fund is benchmarked against the London interbank offered rate and can invest globally in high-yield and investment-grade securities. The portfolio can also short interest rates as a defensive play against rapidly rising rates, a situation that Mr. Eagan said is “easy to derive.” “The biggest risk over the last 20 to 30 years is the reinvestment risk, which initially doesn't feel too bad, but as time goes on and yields drop, you're in a trap and generating insufficient yield,” he said. The quandary right now is how to make money in a low-yield environment, but eventually, investors will need to address the issue of how to react when interest rates eventually climb. Finally, Mr. Buckius described his fund as using a “niche strategy.” The Gateway fund uses options as a way to reduce equity risk and to brace the fund against rising volatility. Among clients and advisers, particularly those in the registered investment advisory community, Mr. Buckius noted that there's “an appetite to come up with other avenues of return to ride out all sorts of markets,” rather than hesitation or apprehension toward getting into an esoteric alternative strategy. “Investors and advisers want to know how the portfolio will perform,” he said. “Advisers realize that with stocks and bonds, they were taking more risk than they had expected.”