Why Invest in Alternative Mutual Funds?

Traditional stock and bond mutual funds have been around for a long time, and most investors are comfortable using them in a portfolio. However, just like many other industries, financial markets evolve. And this evolution means that investors don’t have to experience the significant swings associated with long-only investing. Alternative mutual funds are meant to buffer the downturns in the market and help provide a smoother path to growing your client’s wealth.

Alternative mutual funds provide access to:

new investment approaches
low-correlation asset classes
flexible investment mandates
top industry
talent

New types of investment approaches

Traditional portfolios accept the volatility and valuations of the market at any given time. This means that returns and risk are simply accepted and can vary greatly depending on market cycles. Alternative strategies endeavor to manage risk and therefore allow an investor to target their risk and return as an objective. The ability to short assets, prudently use leverage and invest in assets which may not go down (or even increase in price) when risk assets drop makes this possible.

Lower correlation to risk assets

Given how well both stocks and bonds have performed since the financial crisis, it is easy for financial advisors and their clients to overlook the immediate need for assets that offer diversification. Volatility in both stocks and bonds is very low historically while enjoying very steady returns. A successful alternative investment is one that has a low correlation to stocks and bonds and will perform well when risk assets perform poorly.

Flexible investment mandates

Alternative strategies give financial advisors more freedom to customize portfolios, enabling them to better meet their clients’ investment objectives. Often these strategies are used to mitigate common risks in traditional portfolios while targeting lower portfolio volatility and limiting dramatic losses often seen in such portfolios. By using alternative strategies, financial advisors are able to better define the range of outcomes for their clients.

Some of the best investment talent in the industry

Managing a successful alternative strategy is not easy. It takes skill and experience. Historically the best investment talent has migrated toward hedge funds. Alternative mutual funds endeavor to offer financial advisors and their clients access to the best alternative investment skill in the world.

How Are They Different?