A “Stickier” Alt Fund?

Over the past few years, we’ve devoted a lot of space in these pages to the examination of alternative investments. In those checkups, we’ve gauged the performance of mutual funds and exchange-traded portfolios on the basis of their stated, or time-weighted, returns. That is, we assumed a buy-and-hold stance.

Alas, buy-and-hold is not a universal style subscription for investors. Money constantly moves in and out of funds, often in search of better returns. In turn, investors often receive a return that varies from a fund’s published numbers. More often than not, the investor’s actual return is worse than that earned with buy-and-hold.

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Alts, in particular, are likely to be used opportunistically as speculative plays rather than permanent portfolio components. Partly, that’s due to the narrow focus in each product. It’s no wonder these funds aren’t “sticky.” Investor commitments tend to yo-yo as a fund’s style or strategy goes in and out of favor.

Increasingly, though, investors and advisors are piecing together handfuls of diverse alts into more durable positions to complete portfolios already populated with equity and fixed income investments (we examined the portfolio impact of individual alts exposures last month in “60/40 Is Looking Tired”).

Some alts ETF providers, hoping to capitalize upon the trend, are now rolling up alts exposures into multi-strategy portfolio completion packages. ProShares, for example, takes a funds-of-funds approach in its Morningstar Alternatives Solution ETF (BATS: ALTS), allocating to seven of its ETFs tracking merger arbitrage, long-short equity, managed futures and other strategies.

It’s fair to ask if the assets in these roll-ups are stickier than those of a single-strategy fund. Are investors really learning to hold on to alts exposure?

To answer that question, we must compare the funds’ money-weighted returns, taking into account all of the products’ cash flows, i.e., creations, redemptions and dividends. Money weighting yields the return received by the funds’ average investor.

And, of course, we need to know something of the funds themselves.

A young fund

ALTS, launched less than two years ago, was designed to be an all-in-one alts allocation competing with multi-strategy products offered by IQ Hedge and PowerShares. Unlike its competitors, though, ALTS is passively managed. Or rather, it’s mechanically managed. The ALTS portfolio is built by an optimizer that bases allocations on the component funds’ trailing returns and momentum.

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DisclosureBrad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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