Investing like the wealthiest 1 percent of the population is easier than it ever was -- and more difficult. There are so many more options for the average investor, yet choosing the right asset allocation requires researching strategies that go beyond the traditional pie chart containing bonds, stocks and cash.
The 1 percent seeking both growth and preservation of their wealth often turn to alternative strategies, such as hedge funds to balance out market volatility. According to Brent Fykes, senior investment partner at GenSpring, a firm that manages assets of the wealthy, there are several lower-cost retail hedge funds that replicate mutual-fund structures, but investors need to compare apples to apples. "Long/short equity is NOT long-only equity; merger arbitrage is NOT a bond mutual fund," he says. Make sure you understand the alternative fund's strategy and how it fits in with your traditional portfolio before investing.
Management fees on retail hedge funds range from 1.5 percent to 2 percent, says Fykes. Index funds will charge less, but when assessing fees, use after-fee performance, just as you would when comparing traditional mutual funds, Fykes says. "If a manager is charging 2 percent but the net-of-fee return is 10 percent, that’s better than a manager charging 0.5 percent who has a net-of-fee return of 8 percent." Look for consistency in performance and investment managers, he adds.
Fykes advises that alternatives probably should not comprise more than 25 percent to 35 percent of a portfolio aimed at growth. Investors should expect solid, consistent net-of-fee performance from alternative funds that otherwise could not be replicated by market-based strategies. "These types of alternatives act not only as diversifiers and risk-reducers, but should produce desired returns for investors," he says.
For all investors, he suggests also considering exchange-traded funds, bond funds and other strategies that may achieve your goals and charge lower fees.
Read more on how average investors can take advantage of investing strategies of the 1 percent.
Are you adding alternative investments to your portfolio and, if so, what strategies are you using?
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