Don't ignore basic due diligence on alternatives

Just because alternatives investment strategies are becoming easier to buy and sell — and are being wrapped inside registered products such as mutual funds and exchange-traded funds — doesn't mean that investors can ignore basic due diligence. “You always need to understand what you're purchasing,” said Luke Oliver, director of Deutsche Bank's DBX North America business. He joined David Lafferty, an investment strategist at Natixis Global Asset Management, on a panel discussion about liquid alternatives investments as part of the InvestmentNews Alternative Investments Conference in Chicago. “In terms of the due diligence, you've really got to get your arms around the source of alpha and find out what the strategy's beta is,” Mr. Lafferty said. When it comes to due diligence, most investors fall into one of two camps, he said. “There are those people who are looking for great returns, and they will pay a lot of attention to a track record even if they don't fully understand the strategy. And there are those who will like the story and the strategy, and they don't care as much about the track record,” Mr. Lafferty said said. When the panelists were asked which alternatives strategy they would put their own parents into, Mr. Oliver said that he would use a currency strategy because he believes that over the long term, the U.S. dollar will gain against most other currencies. Mr. Lafferty didn't commit to a specific strategy but expressed support for an allocation to alternatives investments for most investors. Both panelists agreed that as more alternatives strategies enter the registered investment arena, there will be downward pressure on fees. Even though liquid alternatives almost always have lower fees than less-liquid private investments such as hedge funds, the liquid alternatives typically come with higher fees than more traditional mutual fund and ETF strategies.