In the aftermath of the financial crisis, alternatives are becoming more popular with the retail set as advisors seek non-correlated investments for their clients. To satisfy demand, asset managers have been busy rolling out new alternative products specifically designed for non-accredited investors—hedge funds and managed futures inside mutual fund wrappers, for instance.
According to Morningstar data, there were 29 distinct alternative strategy mutual funds launched in 2009, while 38 have been launched this year through Nov. 28.
Alternatives now account for less than 1 percent of the retail market, according to Jon Sundt, president and CEO of Altegris Investments, a platform of hedge funds, managed futures and other alternative investment products that was acquired by Genworth Financial Wealth Management in October. While there’s about $140 billion or so in retail assets across 1,000 funds, Sundt expects this to grow to over $1 trillion in the next three to five years.
Schwab’s Eighth Independent Advisor Outlook Study, which was fielded in July of this year, indicated that interest in alternatives is indeed growing. About 20 percent of respondents said they’d like to invest more in alternatives, behind ETFs at 25 percent. Fifty-three percent of advisors surveyed said they currently invest.
Tony Montanari, director of business development for Capital Guardian Wealth Management, a North Carolina hybrid firm with about $1.5 billion in assets under management, points out that a lot of independent broker-dealer firms are nervous about alternatives and hedge funds because some had bad exposure to Ponzi schemes. But unlike hedge funds, these mutual funds have stricter reporting requirements, including daily net asset value, daily liquidity, an independent board and a bank custodian.
Capital Guardian has selling agreements with a number of firms such as Altegris, SkyBridge Capital and Hatteras Funds for alternatives, said Montanari. Montanari said he also has selling agreements for a couple of Morgan Stanley funds sitting in his inbox.
New Funds
Six weeks ago, Altegris launched its Altegris Managed Futures Strategy Fund (MFTAX), which has accumulated $120 million in assets. The fund provides exposure to managed futures in an actively managed mutual fund structure. The mutual fund charges a management fee of 1.5 percent, according to Morningstar. La Jolla, Calif.-based Altegris plans to launch a full suite of alternative investment products in mutual fund wrappers starting next year, according to Jon Sundt, president and CEO, starting next year. Altegris will roll out global macro and equity long-short strategies in the first quarter of next year, and will launch commodity long-short and emerging markets strategies late next year, Sundt said.
In the Global Macro category, which involves being long-short in interest rates and currencies, Altegris plans to explore sovereign debt and currency markets, especially those in G12 countries, because they believe the prospects for a stronger U.S. dollar may be limited, Sundt said. Also, such countries have healthier balance sheets and higher yields, he said. As for its emerging markets strategy, Altegris would also go long-short to hedge against volatility.
Altegris is also eyeing equity long-short strategies to provide the ability to hedge; interest rate long-short strategies, because it’s a volatile time for interest rates; and commodity long-short strategies. “Long-only commodities is very volatile as investors found out in 2008,” said Sundt.
New York-based Thesis Fund Management, a subsidiary of holding company Thesis Capital Group, is also rolling out new hedge-fund like mutual funds. CEO Stephen Roseman, a former hedge fund manager, launched Thesis Fund management in January of 2010 exclusively to bring alternatives to retail. Roseman shut down his hedge fund and reimbursed investors in late 2007 and early 2008 to focus on the mutual funds. In March, Thesis rolled out its first fund, Flexible Fund (TFLEX), a global long-short mutual fund with a total management fee of 2.25 percent. Roseman said Thesis has plans in the future to launch additional products that employ hedge fund strategies. Possibilities include a concentrated activist fund, levered loan funds, dedicated short fund, and distressed debt strategy. He declined to say when these products would be launched.
The Flexible Fund currently holds $8 million in assets, and has 1,500 broker-dealer selling agreements, Roseman said. Fidelity and Charles Schwab were among the first to put it on their platforms.
The Altegris and Thesis funds mentioned above are young: they haven’t built up a long track record of performance. But from inception through Nov. 30, 2010, Thesis’ Flexible Fund was up 1.20 percent. For the month ending Nov. 22, 2010, the Altegris Managed Futures Strategy Fund fell 2.73 percent, versus the S&P 500, which gained 1.45 percent.