Investors are rushing out of equities as markets grow increasingly volatile, but maybe there’s another alternative to just sitting on the sidelines and leaving stocks to the big institutional investors.
Morningstar’s alternative investments analyst Mallory Horejs says that an increasing number of funds in the alternative investments space, using a wide variety of strategies, offer investors a chance to avoid all that anxiety producing volatility, to be protected on the downside and even to have a shot a earning a decent return through it all.
“In the last few years a number of new alternative investment fund strategies have come out,” Horejs told On Wall Street, but most of them are only one or two years old, so they don’t have a track record for investors to look at.”
Fortunately, she said, there are some more venerable funds that do have more of a track record and she has selected three which she said have done quite well during trying times for those investors who turned to them.
“These are not investments that we think should be made directly by most individual investors,” cautioned Horejs. “They should probably be made with the help of a financial advisor.” And an advantage, she noted, is that one of the three funds has a $5 million minimum investment requirement, “but that requirement is generally waived if the investment comes through an advisor.”
The three funds recommended by Horejs are:
-- The Merk Hard Currency Fund (MERKX), one of the oldest and largest such funds, with $588 million in invested assets, this fund was up 6.5% for the year through Aug. 9, when the S&P was down 5.7% for the period. Looking at just the four-day period of high volatility between Aug. 8 and Aug. 11, the fund was down 0.08%, compared to the S&P’s four-day loss of 2.15%. During the same four days, the average currency fund performance was negative 0.49%.
-- The Arrow Managed Futures Trend Fund (MFTFX), like most managed futures funds, has almost zero correlation with the equities markets, and like them, it offers the chance for upside potential when markets rise.
This fund was up 1.9% for the year to date through Aug. 9, a solid 7.6% better than the S&P over that period. During the four-day period ended Aug. 8, it was up 0.77%, while the market was down 2.25%. The average performance over that four-day stretch by its managed futures peers was a gain of just 0.11%. On downside: managed futures funds tend to be expensive, and this fund’s 2.0% expense ratio is even higher than the average of 1.88%.
-- The AQR Diversified Arbitrage Fund (ADAIX) is basically for institutional investors, with a $5 million minimum investment, though as Horejs points out, by going through a financial advisor this restriction doesn’t apply. A market neutral strategy, this fund eked out a small gain of 0.1% during the year-to-date period ended Aug. 8 while the S&P slipped 5.7%.
For the four-day period of volatility ended Aug. 11, it was up 0.36%, while its peer group funds were down an average of 0.1%. Back in the fall of 2008, when the market crashed 37%, this fund managed to escape with a loss of just 0.3%.