|
 In fact the gap between the best and worst performers among
alternative mutual funds has grown so big that picking one might
entail risks similar to those that investors seek to avoid.
"Manager selection is always important and especially important in
alternatives," said Lawrence Restieri Jr., an executive at Goldman
Sachs Asset Management. "You just end up with a wider range of
outcomes."
Last year, 64 alternative mutual funds were liquidated or merged
into other funds, compared with 40 funds that were weeded out in
2014, according to a Reuters analysis of Morningstar Inc data.
Whitebox Advisors LLC, a hedge fund firm that lists efficient risk
reduction as its top investment principle, last month became the
latest money manager to close its mutual funds to new investors. The
largest of the shuttered funds, Whitebox Tactical Opportunities,
shed a fifth of its value over the last year, according to
Morningstar.
In a market with few clear winners and many underperforming stocks
and other assets, many funds struggled with a basic task: picking
winning stocks.
Many bet on losers and made things worse by selling short those that
turned out to be the winners.
"It was a really tricky market where it was easy to get tripped up,"
said Morningstar alternatives analyst Jason Kephart.
"I wouldn't be surprised to see more closures if it continues to be
a challenging environment," he said.
The "liquid alts" have grown in popularity since the financial
crisis as financial advisers marketed the funds to investors as
investments that do not move in tandem with stock and bond markets -
particularly when both assets are losing value.
Assets of U.S. alternative funds tracked by Morningstar grew to $212
billion last November from $87 billion in November 2009 and
consumers invested a net $18.3 billion in those funds through
November, roughly at par with $19 billion in 2014.
To limit swings in price, their managers use hedge-fund like
strategies, including trading in futures, commodities, and
short-term rates.
But unlike hedge funds, the "liquid alternative funds" do not lock
in investors for set periods, allowing them to pull out money at any
time. That may force managers to sell into a tumbling market to the
detriment of longer-term performance.
WINNING QUARTET
In fact many such funds came under pressure during the stock
market's sell-off in August and in a year of negligible gains across
financial assets and products many alternative mutual funds did even
worse, posting negative returns. (Graphic:http://tmsnrt.rs/1mRc9ap)
One challenge was that very few stocks delivered the bulk of the
gains. So few that investors coined a term "FANG" for the winning
quartet of Facebook Inc, Amazon.com Inc, Netflix Inc and Alphabet
Inc, better known as Google.
In addition, many of the alternative investments turned sour. Small
companies trading at apparent discounts lost even more; exposure to
China, energy and commodity markets as well as high-yield debt, all
brought losses.
The Whitebox fund's managers have conceded that despite their goal
of avoiding "high-risk assets" it was their selection of losing
stocks that hurt their portfolio the most.
[to top of second column] |
The firm's largest bets against stocks at the end of September
included those against FANGs - Netflix and Amazon, which were up 11
and 32 percent respectively in the fourth quarter, according to
Morningstar.
"They basically just got it wrong where the risks were, and they
bought things that looked cheap but kept getting cheaper," Kephart
said.
In contrast, some of the top performers, such as Vanguard Market
Neutral, which was up 5.5 percent last year, picked their losers
well. Among its largest shorts at the end of November were several
of last year's worst performers, including Platform Specialty
Products Corp, Keurig Green Mountain Inc, and Cypress Semiconductor
Corp.
In all, however, the long/short equity subset of alternative mutual
funds fell 0.9 percent for the year to Nov. 30, while the comparable
hedge fund category was up 0.2 percent in the same eleven months.
Among the laggards is MainStay Marketfield, which was once the
top-selling alternative mutual fund, but has delivered strongly
negative returns for each of the past two years.
Neither MainStay nor Whitebox executives were available to comment
for this story.
Yet while fund launches have slowed and closures increased,
BlackRock Inc, Blackstone Group LP, Goldman Sachs Group Inc and
others have continued to roll out new alternative mutual funds.
With fees of about 1.7 percent of assets per year, according to
Lipper, they can be highly profitable for managers. At BlackRock,
for instance, alternatives - including such products as hedge funds
- account for just 3 percent of assets but 8 percent of so-called
"base fees," which includes what the firm charges to manage the
money.
While typical actively-managed funds usually charge 1.1 percent and
those that track an index 0.8 percent, alternative funds cost less
than the "two-and-20" common to hedge funds - two percent of assets
and 20 percent of gains.
And last year's shake-out might just what the market needed after
years of rapid growth, Morningstar's Kephart said.
"People were in such a rush to get in, raise money and figure out
the actual performance part later."
Now, he says, we are finding out who is worth the money.
(Reporting by Trevor Hunnicutt; Editing by Tomasz Janowski)
[© 2016 Thomson Reuters. All rights
reserved.] Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
