Financial Literacy - Retirement income planning
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Hedge funds for the average investor

Commodities

Commodities also may be a good alternative option for the individual investor's portfolio.

"Commodities are worth considering not for returns but because they act like portfolio insurance. By themselves they're very volatile, but when you add them to a portfolio, the historical evidence is that you reduce the risk of the portfolio and get higher risk-adjusted returns," says Larry Swedroe, principal and director of research at Buckingham Asset Management in St. Louis.

That wasn't particularly the case in the most recent bear market, though. According to Morningstar, most commodity indexes did worse than the S&P 500 in 2008, which was down 37 percent for the year. For instance, the natural resources category, which includes gas and oil, took a 48 percent hit.

Swedroe, author of "The Only Guide to Alternative Investments You'll Ever Need," particularly recommends commodities in the form of fully collateralized commodity futures.

Fully collateralized means unleveraged. Commodity futures are speculative financial instruments known as derivatives that are financial contracts written on the future price of a product.

Just like with equities, some commodity funds use long-short strategies in an effort to improve returns. Some commodity funds are actively managed, while other ETFs and mutual funds follow commodity indexes.

Multistrategy funds

A few fund companies offer products with a number of different strategies in one absolute return product, called a multistrategy mutual fund.

As a mutual fund, the way it works is that the manager sets up different accounts as a custodian. All of those accounts together would be contained in one mutual fund.

They're "just different alternative strategies combined into one. What they try to do is target equity-like returns and bond-like volatility," says Chu.

Individual investors looking for alternative investments might rather go with a multistrategy fund than a long-short fund, Chu says. "You probably want to go with a multistrategy fund-of-funds mutual fund."

Some of these funds have somewhat prohibitively high minimums, but others can be reasonable for anyone.

"We use those alternative mutual funds in our own 401(k) here at Wellstone, and we also recommend that for other 401(k) plans that we administer," says Chu.

"In the end the manager selected may not be as, I don't want to say 'good,' but may not be the best manager out there," he says. "But again, it goes back to the fact that it is more important to get the asset classes correct since we know over time that tends to add more value than manager selection."

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