Are alternatives in your future? Should they be? While many advisors are reluctant to recommend them, alternative mutual funds are growing at a propitious rate. And with returns from traditional markets promising to be low in the future, alternatives could be one way to boost returns.
According to a study of 1,300 advisors, only 25% of advisors regularly invest in hedge funds, private equity and commodities. Those who represent high net worth clients are more likely to do so; overall, 70% indicate that they need new strategies.
Instead of traditional alternative investing in hedge funds that require large investments and where funds are tied up for long periods of time, many advisors are recommending alternative mutual funds, according to a recent New York Times article. These funds have been growing very quickly, increasing 33% from 2012 and almost 500% since 2007. In 2008, when the S&P dropped 37%, alternative mutual funds lost only 15.4%.
But alternatives are hard to explain to investors, have a short track record, and tend to be more expensive (with an average expense ratio of 177 BPs compared with 128 for active mutual funds).
So do alternatives make sense for DC plans? If DC plans are starting to emulate the design of DB plans, it makes sense to follow their investment strategies, which regularly outperform DC plans, and add alternatives to the mix.
