As alternatives strategies continue to flood into the registered mutual fund and exchange-traded funds arena, investors and financial advisers should be aware that most mutual funds and ETFs will never match up completely with private investment products such as hedge funds.
During a panel discussion Tuesday at the InvestmentNews Alternative Investments Conference in Chicago, participants ticked off distinctions between registered and unregistered alternative products ranged from fees and liquidity, to the reality of manager skill levels.
“I think it's really hard to find a long-only manager who can short because it's hard to develop those skills,” said Gary Black, global co-chief investment officer and chief investment office of alternative investments at Calamos Investments.
Despite the fact that the mutual fund industry has launched more that 600 alternatives strategy funds since the start of 2011, the panel generally agreed that advisers should approach most of the funds with caution. Of course, that advice also applies to alternatives outside the mutual fund space, including hedge funds.
Christian Hviid, managing principal with Point Guard Capital LLC, warned against being too attracted to the lower fees that accompany registered alternative products but also advised against paying too much for strategies that could be found inside a less-expensive mutual fund.
“When it comes to fees, be careful what you pay for,” he said. “In some cases, there is a wide disparity in fees and not a lot of transparency, as far as what you're paying for.”
Mr. Hviid reminded the audience that most registered products won't have long track records, making that part of the due-diligence process more challenging.
He also advised investors to pay close attention to potential mismatches with regard to what a fund is offering in terms of a strategy, and the skill and experience level of the management team.
On the issue of due diligence, Mr. Black said that he would be skeptical of any long-short mutual fund that was using ETFs for the short side of the portfolio, as opposed to picking individual stocks to sell short.
That is a red flag that the portfolio manager is less skilled on the short side of the portfolio, he said.
But as demand for non-correlated strategies continues, the panel agreed that the fund industry will continue to crank out alternatives strategy products.
“We expect to see more funds crop up in nontraditional bond fund space,” said Susan Kelly, director of alternatives strategies at Commonwealth Financial Network.
In terms of the impact on the overall alternatives arena, including the $2.3 trillion hedge fund industry, Ms. Kelly said that the growth of registered alternatives strategies is both attracting institutional investors and sending institutional investors back to the hedge funds to renegotiate the fee structures.
Hedge fund fees typically include a 2% management fee and a 20% performance fee, which compares with a roughly 1.5% fee for most alternatives mutual funds.
But swelling popularity aside, Mr. Hviid reminded advisers to keep their clients' best interests and comfort levels in mind when it comes to allocating to alternatives.
“You have to step back and ask if alternatives are even appropriate for your clients,” he said.
“Think about what strategies will offer the best complement to what they already own,” he said. “It's not just a case of 'I must own alternatives.'”