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

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.”

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