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Alternatives for small investors

By Barbara Whelehan ·
Friday, May 6, 2011
Posted: 2 pm ET

Alternative investments are all the rage among heavyweight investors. U.S. pension funds are boosting their allocations to hedge funds, according to a recent article on, a website that tracks news of interest to chief investment officers of pension funds, endowments and foundations. These guys are the so-called "smart money."

Individual investors can learn a lot by following the smart money. By that I don't mean they should take the same actions, but just sit back and watch.

Desperately seeking alpha

What's driving this interest in alternatives on the part of institutional investors? Pension liabilities are a big reason, according to an analysis by Infovest21, which gathers information for hedge funds.

Remember 2008? Everyone, including the big guys, took a big hit that year. Infovest21's report states that more institutions are looking to "alpha" as a way of reducing those liabilities. Alpha is shorthand for "excess return." So CIOs are putting as much as 20 percent to 30 percent of their equity stake in long-short funds, for example. That's huge.

I can't help but wonder if taking such a big stake in alternatives is in keeping with their fiduciary responsibilities.

Even government pension funds are getting into the hedge-fund game. Nearly 300 public pension plans around the globe currently have exposure to them, compared to 196 plans in December 2007, according to the article on

Last week, the website for CIOs reported that Japanese pensions will increase their exposure to alternatives and decrease their allocations to domestic stocks and bonds. Some 89 percent of the 119 Japanese pensions surveyed said the recent earthquake, tsunami and nuclear disaster are not greatly impacting their investment strategies.

Hedge funds for the small guy

Individual investors who want direct exposure to a hedge fund generally have to be super wealthy to get in the exclusive club. And they have to pay big bucks for the privilege. Typical fees, dubbed "2 and 20," mean 2 percent of assets plus 20 percent of the profits go to the hedge fund managers.

But with expense ratios of less than 2 percent on average, the mutual fund industry democratizes some hedge-fund strategies, offering its own lineup of alternative funds for small investors. Bankrate's story on alternative investing strategies explains three strategies -- those of long-short, managed futures and market neutral funds. Other alternative investments include funds focused on currencies, precious metals, commodities and even bear funds.

Below is a sampling of the largest mutual funds that dabble in five types of alternative strategies. The returns shown are through the end of April. Commodities have done well, but in the last week they swooned in unison. Commodities funds lost 7 percent in the week through May 5, according to Morningstar. Precious metals lost 9 percent that week.

That's the problem with these alternatives. Many have periods of great glory, followed by periods of utter humility. I don't advocate using them for retirement planning purposes. But if you decide to do it, I wouldn't load up on them like the big guns do. Maybe allocate 5 percent of your portfolio to these alternative strategies if you feel you must.

Alternative mutual funds
Name Net assets (in millions) 1-year total return, % 3-year* total return, % 5-year* total return, % Manager tenure (avg) Alpha, 3-year
Currency funds
Franklin Templeton Hard Currency A 591 13.89 4.55 6.18 5.25 4.24
Merk Hard Currency Inv 550 14.13 4.81 7.89 6.00 8.35
Lord Abbett Emerging Markets Currency A 339 10.84 4.54 6.18 1.83 12.10
Columbia Absolute Return Currency & Inc A 158 0.90 1.70   4.92 0.19
Precious metals funds
Vanguard Precious Metals and Mining Inv 5,539 38.56 -0.03 8.92 9.17 28.86
Oppenheimer Gold & Special Minerals A 5,113 37.48 19.06 17.92 13.83 33.57
Fidelity Select Gold 4,976 27.52 16.20 13.20 3.75 24.60
Franklin Gold and Precious Metals A 4,111 33.37 19.29 16.75 8.75 32.04
Long-short equity funds
Hussman Strategic Growth 5,652 -4.67 -2.90 -1.12 10.83 -3.03
Gateway A 5,451 6.89 -0.13 2.59 7.97 -1.66
Diamond Hill Long-Short A 1,984 8.87 -2.34 1.38 7.86 -4.04
Marketfield 735 5.37 9.77   3.83 7.75
Market neutral funds
Merger 4,532 5.14 4.78 4.35 4.33 3.97
Calamos Market Neutral Income A 2,365 6.65 2.64 3.39 10.89 1.20
Arbitrage R 2,331 0.82 3.29 4.24 5.28 2.61
GMO Alpha Only III 2,175 -0.88 -0.53 1.68 14.42 0.00
Commodities funds
PIMCO Commodity Real Return Strategy Instl 28,581 39.66 -1.58 5.77 3.42 1.17
Fidelity Series Commodity Strategy 8,888 29.40     1.55  
Credit Suisse Commodity Return Strategy A 5,874 30.70 -4.80 1.85 3.17 -3.66
Highbridge Dync Cmdts Strat A 2,571 49.46     1.33  
Barclays Capital U.S. Aggregate Bond   5.36 5.81 6.33    
Standard & Poor's 500   17.22 1.73 2.95

Copyright 2011 Morningstar Inc.
* Three- and five-year returns are annualized. Returns are through April 30, 2011.
Past performance is no guarantee of future results.

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