Alternative to Alternatives
Use of absolute-return investments as an alternative to
fixed-income investments has also caught on with financial advisors. With a
similar expected risk/return profile, some absolute-return mutual funds may
insulate investors from lackluster bond performance and rising interest rates,
while potentially offering higher expected returns.
Some investors continue to remain cautious about hybrids,
pointing to the potential for reduced performance in rising markets. Because of
their low correlation to traditional financial indices, absolute-return mutual
funds may not capture the same returns as relative-return vehicles during a
period of rapid market growth. And because these funds employ strategies that
require greater skill and, in some cases, access to multimanager strategies, fee
structures may be greater than those with conventional single-manager mutual
funds. Still, fees tend to be significantly lower than those of average hedge
funds.
Advisors and investors are wise to understand each fund’s
objective in the prospectus and to closely examine single-manager funds, which
can lead to single-manager risk. Investors should avoid managers who do not have
experience managing money through sophisticated alternative strategies such as
short selling.
But the risk of not using these strategies can be higher than the risk of
using them. Absolute-return mutual funds can lessen the impact of market
volatility on a portfolio and might just add solid returns along the way. Jay Compson is cofounder and principal of Absolute Investment
Advisers and a portfolio manager for the Absolute Strategies Fund. |  |
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