The explosion of alternative-strategy mutual funds and exchange-traded funds has been a boon to advisors whose clients are still leery about stocks and increasingly disappointed by bonds. But, while assets are rising and new products continue to roll out, some holdout investors and advisors still ask, "What the heck are 'alternative funds' anyway?" and furthermore, "What will they do for me?"
The common notion is that alternative investments (alts) are products intended to produce returns that are uncorrelated (or only mildly correlated) with traditional portfolios of stocks and bonds. For years, many of the techniques and securities that were used to produce these uncorrelated returns were found only within hedge funds, pensions and private portfolios for clients who either didn't need ready access to their money or whose cash flows were predictable and stable. However, well-publicized success by certain Ivy League endowment managers prompted advisors to demand alts from fund manufacturers, and the industry responded with lots of new products and services to help advisors position alts in their clients' portfolios.
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