September 19, 2014

Worried about the stock and bond markets? Are alternative investments the solution? Alternatives, such as hedge funds now come in a liquid mutual fund form so they can be bought and sold daily on an exchange. They are regulated and transparent, so you know what they own – and the fees are considerably less than hedge funds. Most are available to average individual investors. These Liquid Alternative funds have taken off – their assets have increased ten fold since 2005. Lipper’s Robert Jenkins and Altegris Advisors’ Lara Magnusen discuss the risks and rewards of alternative investments.

CONSUELO MACK: This week on WealthTrack, once the domain of institutions and the uber- wealthy, alternative investments are now widely available in a new form, and are open to individual investors. Liquid alternatives investments experts, Altegris Advisors’ Lara Magnusen and Lipper’s Robert Jenkins guide us through this hot territory. Next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. After the financial crisis, which was a huge blow to individual investors psychologically and financially, everyone was asking themselves what is the alternative to traditional stocks and bonds? Where can I go for true portfolio diversification and protection from market volatility and downside risk?

For answers they looked to what institutions and high net worth investors have been doing for years, diversifying into what were known as alternative investments, which traditionally cover a multitude of products. Among them: hedge funds, which could short stocks, bonds and other securities and had unlimited flexibility to invest wherever and however they chose.

Private equity and venture capital funds which make sizable stakes in mostly privately held companies. So called tangible assets such as real estate, timber, farmland and commodities.

But these investments had their own set of problems. They were illiquid, you were either locked into them for a certain period of time and/or there was no market for them if you wanted to get out during the crisis. Many were opaque, meaning you generally didn’t know what was in them and they had very high fees.

Since then Wall Street has come to the rescue with a new class of alternative investments that is supposed to solve many of those problems. They are called liquid alternatives. They come in mutual fund form so they can be bought and sold daily on an exchange. They are regulated. They are transparent, so you know what they own and their fees are considerably less than hedge funds, although they are generally more than typical mutual funds, and most are available to average individual investors.

Liquid alternative funds have taken off. Their assets have increased ten-fold since 2005, from $33 billion, to $73 billion at the height of the financial crisis in 2009, to $123 billion in 2010 to $177 billion in 2012 to $308 billion in 2013.

Liquid Alternative funds also come in all shapes and sizes. At last count mutual fund analysis pioneer Lipper had identified 11 different categories, including the most popular by far, Alternative Credit focus funds, also known as Unconstrained Bond funds, Alternative Long/Short equity funds, the second most popular and Absolute Return funds, coming in at a close third.

What role should liquid alternatives play in a portfolio? Which ones, if any should individuals consider for their portfolios?

Joining us are two pros in this burgeoning field. Both are newcomers to WealthTrack. Robert Jenkins is the Global Head of Research at Lipper and has over 20 years of experience in the financial services and asset management industries including stints at Fidelity and McKinsey & Company.

Lara Magnusen is Director of Investment Products and Member of the Investment Committee at Altegris Advisors, an alternative investment management firm. She was formerly its Director of Research and Investments. She holds the designation of Chartered Alternative Investment Analyst, or CAIA.

I started with the basics. Asking them each to define what constitutes an alternative investment?

ROBERT JENKINS: Well, when we think about alternatives, and one of the important caveats here of course is that it’s still very much evolving, and for years I know a lot of asset management firms, a lot of advisors, they looked at anything that was alternative that wasn’t stocks, bonds, cash. That included commodities and pass-throughs like REITs, et cetera, and I would view those more as alternative asset classes because they kind of have a distinct value proposition to them. Nowadays what everyone’s really talking about are Liquid Alternatives, and we view these as alternative strategies. Often times they have hedge fund-like strategies kind of embedded underneath whether they’re using shorting or derivatives or leverage or what have you. Also often times they have multiple asset classes embedded within them as well, and the really nice thing about them, the reason why they’re so popular now is they contribute a benefit in terms of correlation and diversification to a portfolio.

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