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.

WEALTHTRACK Episode #1113; Originally Broadcast on September 19, 2014

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Robert Jenkins & Lara Magnusen

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Global Head of Research, Lipper


Director of Investment Products, Altegris Advisors

Consuelo Mack

The bulls are running, Alibaba’s IPO is priced and the Federal Reserve is sticking to its guns to keep interest rates near zero for a “considerable time.”

So why am I worried? I am delighted that the stock market is hitting new highs, but this lengthy rally makes us even more overdue for a correction. Kudos to the Fed for reassuring the markets by keeping interest rates where they are, while it ends its QE bond buying program on schedule next month. They are taking this one measured step at a time. At some point this holding pattern will end. The longer it goes on the harder the landing could be.

Where does Alibaba fit into this? Priced at $68 a share tonight, the $21.8 billion offering gives it a market cap of $168 billion, making it one of the 40 largest public companies in the world. It’s bigger than U.S. online-shopping giant with its current market value of $150 million. This is all according to The Wall Street Journal.

Just wait until it starts trading in the open market tomorrow. There is a lot of excitement about this offering so it should be pretty hectic and explosive. But here’s the rub. It’s a Chinese company, problematical right there, with a weird corporate structure. Franklin Templeton’s legendary emerging markets guru Mark Mobius who is known for his adventurous, entrepreneurial spirit was quoted saying its structure is ‘dangerous,’ ‘quite risky, and it’s probably not a good idea to go after it.’ Mobius knows his stuff.

I am not going to go into it in detail, check out this story

In a nutshell this “variable-interest entity” or VIE means there is a dual share class. A small group of managers, including founder Jack Ma have control of all of the assets and everyone else owns a stake in a company registered in the Cayman Islands. That’s reassuring!

The other aspect that I don’t like is that so many early private investors can sell shares immediately tomorrow. According to the Journal, more than $8 billion dollars worth, about a third of the shares being offered could be sold. Why would they do that? Why are they being allowed to do so? Only they and Ma can answer that question.

As the stock markets go into overdrive we are looking at one of the few asset classes that is designed to go in another direction. Think back five years. It’s after the financial crisis. Everyone is asking themselves what is the alternative to traditional stocks and bonds? Where can they go for true portfolio diversification, i.e., 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 are 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, farm land and commodities.

However 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 these 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. 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 $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, which are 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? This week we put those questions to 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.

They will give us the basics on alternative investments and take it from there.

If you can’t catch the show on public television it will be available on our website.  For those of you who would like to see our program in advance of the broadcast, you can subscribe to our WealthTrack PREMIUM subscription service on the website.

In our web series, WealthTrack WOMEN, our award-winning women advisors will discuss one of the most traumatic transitions of any woman’s life – widowhood – and the best way to handle it financially. We’ll also have EXTRA interviews with both Magnusen and Jenkins which are available exclusively on our website.

Also, I want to thank all of you who are following me on Twitter, @ConsueloMack.

I try to limit all the noise coming your way, including my tweets, to a few highlights from our interviews, along with anything else I think may be of interest to you – our long-term investor viewers.

Have a great weekend, enjoy the beginning of fall, and make the week ahead a profitable and productive one!


Best Regards,



Mathews Asia


  • Many new and inexperienced players
  • Many strategies are untested in different market cycles
  • High fees compared to traditional mutual funds
  • Experience counts
  • Go with managements with proven track records over many years and market cycles
No Bookshelf titles this week.


– Have a foundation of traditional income producing investments

– Own absolute return alternative investments


– Recommends 35% in core absolute return strategy
No stock mentions in this episode.

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Robert Jenkins, Head of Global Research at Lipper doesn’t just track existing  mutual funds he is also on the lookout for ones that are being developed. He says there are some interesting income-oriented products in Japan that could be heading our way.


Lara Magnusen is so committed to alternative investments that she became a Chartered Alternative Investment Analyst, or CAIA and has been Director of Research and now Director of Investment Products at alternative investment specialist, Altegris Advisors. She explains why she decided to focus on alternatives in the first place.

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