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Investing in alternatives

By Sheyna Steiner ·
Wednesday, January 19, 2011
Posted: 8 am ET

Hedge funds are so 2000s. The exclusive investments of the rich and richer may be on their way out; in their place institutional investors and investment advisors are buying alternative mutual funds and ETFs.

A survey by the investment research company Morningstar, and Barron's, the investment magazine, found that the liquidity and transparency of mutual funds and ETFs offering alternative investing strategies are becoming preferable to hedge funds for some big investors.

Apparently $2.7 billion flowed out of hedge funds in the third quarter of 2010 while $17.3 billion flowed into alternative mutual funds, according to the press release on Tuesday.

The survey found that even though hedge funds may be falling slightly out of favor, alternative investments are becoming even more vital to big-time portfolios.  Over 70 percent of institutional respondents to the survey and 66 percent of advisors said that alternatives will be as important or more important than traditional investments over the next five years.

Where does that leave the relatively small-fry investor?

While most individuals find themselves firmly shut out of hedge funds based on net worth requirements -- $1,000,000 not counting a primary residence -- or income requirements, individuals can access hedge-like mutual funds.

Hedge funds invest in a wide variety of assets and use any number of strategies to boost their returns. Alternative mutual funds employ some of the same methods.

This Bankrate feature, "Hedge funds for the average investor," looked at some of the most common alternative mutual funds out there, including long-short funds, commodities and multistrategy funds.

But it's a big investment universe out there. A story on, "Time to look at alternative mutual funds," reported that including exchange-traded notes, exchange-traded funds, closed-end funds and mutual funds, there are 500 registered products that could be considered alternative investments.

Though investing in alternatives is much more expensive than traditional, actively-managed funds -- fees can be as high as 5 percent annually -- they may be useful in rounding out a diversified portfolio.

The trick is figuring out which investment may be best for your portfolio, which is where a trusted financial advisor could come in handy.

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