How do multi-asset alternative funds work?
My fund employs a rules-based methodology designed to avoid risk
and produce positive returns regardless of the condition of the
financial markets. It's a strategic asset allocation fund, but it
tactically shifts its allocations to reduce its correlation to the
broad market during periods of volatility. Its multiple asset class
approach uses futures and exchange-traded funds (
) to build a multi-asset alternative portfolio. This approach is
similar to the one used by university endowment funds at Yale and
Vanderbilt. Our fund has attracted substantial inflows from
investors who want a fund that provides both growth and a safe
Our methodology is not designed to hit home runs. Instead, it
aims to lose as little as possible during down periods, while
producing gains during up periods. This leads to a more consistent
performance, which preserves capital regardless of market
What's your outlook for the markets?
The current volatility will continue for several years. The
biggest reason for this continued volatility is that the structural
problems that became apparent in 2008 haven't been solved; they
were just passed off to the government. Global investors are very
concerned about how developed nations' governments are handling the
situation. Policymakers in both the US and Europe have yet to
address these problems in a credible manner. Meanwhile, we may be
sliding into another recession. It all boils down to uncertainty.
Investors want to see the government reduce spending. But it will
take policymakers years to reduce spending in a meaningful way, and
there will be a lot of political bickering before the 2012 US
election. Until our politicians propose such structural reforms,
investors are unlikely to have the confidence necessary to turn the
What are your thoughts on the situation in
A default in Greece is almost inevitable. The European debt
situation is actually worse than that of the US, so it's going to
take some time to resolve it. That debt has to be reset somehow,
either through a default or a eurobond solution [jointly issued
bonds that would share the debt burden among EU nations].
Unfortunately, the US could soon find itself in the same situation.
The US will probably experience slower growth for quite a while,
simply because our debt burden is absorbing so much capital.
How is your fund currently positioned?
We cover almost every asset class but traditional individual US
and international stocks and US bonds. Three months ago, we were
long all 12 of the largest and most liquid stock markets in the
world; today we are short each of them. That tactical shift has
saved our performance during the most recent turmoil. We follow
trends because they reflect the cost of what's actually happening
in the markets. Our fund went short in early August and it's been
that way ever since.
We have exposure to seven of the most liquid currencies, four of
which are long and three of which are short versus the dollar. The
three that are short the dollar are the euro, the Canadian dollar
and the British pound. For the last two years, all of our
currencies have been long versus the dollar because the dollar was
weak. But the flight to quality is changing the dynamics of the
currency markets due to a strengthening greenback.
A stronger dollar has also affected our commodity portfolio. For
the last two years, we were long most commodities until late July
or early August. Now 13 of our positions are short and seven are
long. Gold and silver are obviously helping pad returns, as are
agricultural commodities such as sugar, corn and soy beans. We're
currently short on the energy complex because of the downside risk
in the economy that's implied by the trends.
Our global bond positions, which cover eight of the most liquid
bond markets in the world, are mostly long and doing well. When
yields start climbing in a few years, we have the ability to hedge
the downside risk of a declining bond price.
It appears your fund has adopted a bearish
It has nothing to do with our opinion; it has everything to do
with what's happening on the ground. I've always been an optimistic
investor, but the trends are pushing us into protection mode. So if
the markets continue to fall, we'll make money, just like we've
made money the past several years on the upside in the markets. If
the time comes when sentiment improves and trends begin to change,
we will shift into bullish mode.
Are traditional long-only investors setting themselves up
to fail in this market?
Buy-and-hold investors have certainly suffered during the last
10 years. It's been a difficult environment for people to reach
their investment goals, such as saving for retirement. To break
that trend, you have to do what Yale, Vanderbilt and other
successful institutions have done for years. They use alternatives
as their core investment to protect assets. To many investors
solely use stocks for the growth component of their portfolios
without realizing there are other asset classes that can achieve
that end. Of course, you can't rely on long commodity positions as
your only diversifier either. In times of economic duress,
commodities can also decline because consumers stop spending.
Investors need exposure to non-correlated asset classes that can
zig when the markets zag.
How do you define a trend?
We use seven different time frames, ranging from a short-term
90-day trend to a 360-day trend on the long-term side. We survey
the trends over these time frames in aggregate to avoid getting
whipsawed or falling behind the trend. As long as the majority of
the timeframes we monitor show a sustained trend on the upside or
the downside, we're comfortable going long or short on that
We also don't follow fundamentals because they can be
misleading. You could watch a stock that reported a nice quarter or
has a solid balance sheet, but the stock still declines because the
entire market is falling.
What's your best piece of advice for investors?
Investors should focus on adding alternatives that can help
protect their portfolios from downside risk. Buy a mutual fund that
employs multiple alternative strategies. I would also suggest that
they avoid market-neutral mutual funds; because they're neutral
they generally don't produce significant returns. They protect your
downside, but they have very little upside. Investors who want to
have growth, but also want to hedge risk should choose a
multi-asset, multi-strategy portfolio.
How does one choose an alternative strategies
If you don't have a financial adviser, I would suggest
researching the multi-asset alternative category (there are about
160 mutual funds available) and find the funds that give the
smoothest return. In particular, look at their performance in 2008.
That calendar year gives investors a good idea of how a fund
performed under the worst-case scenario. A single multi-asset fund
should be sufficient because it gives investors a core portfolio,
with everything they need.
Also, when you look at a fund, make sure the fund invests in
very liquid assets. Some funds get into trouble because they don't
focus on liquidity. These funds often sell their assets at a steep
discount in weak markets to pay out investors who are redeeming
their shares. So liquidity is crucial.
The best strategies are the ones that are designed to profit
when the market rises or falls. If investors only buy a short fund,
they'll lose money two-thirds of the time. Long-term investors need
a fund with the ability to go both long and short. I favor funds or
strategies that follow a trend versus the ones that follow
fundamentals. The funds that followed a trend performed better in
2008 and continue to outperform funds that follow
How much should investors allocate to alternative