A March 21, 2014 article in The Wall Street Journal (“The New Hedge-Fund-Like Retail Funds”) both highlights the expanding array of mutual funds that are offering hedge-fund like strategies to the investing masses and the risks that may make these investments unsuitable for retail investors.
In fact, this article notes that assets invested in these alternative funds, which are being managed by both Wall Street firms (including Morgan Stanley and Goldman Sachs) and independent investment advisors, have increased from $41 billion at the end of 2008 to $286 billion in 2013.
But while the marketing of these funds may tout their purported ability to “re-create the secret sauce of hedge-fund investing” and to offer that “secret sauce” to ordinary investors with their minimal entry level of as low as $1,000 per investment, investors are cautioned that they should not “rush to join the club.”
In the words of Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his research on how investors should allocate their assets to get the best balance between risk and reward, “I wouldn’t touch it with a 10-foot pole.”
These alternative funds are often complicated to understand, are commonly unclear as to their holdings and the conflicts/fees that may be associated with them and, of equal if not greater importance, may be forced to liquidate their assets at unfavorable prices in order to meet investor redemption requests.
When you add in the reality that the performance of alternative funds has often lagged the market in general and that their returns have not yet been “tested” in a declining market environment, the “secret-sauce” being touted brings with it the caution, as noted in this article, that while “it’s getting easier to invest like a hedge fund, that doesn’t necessarily mean you should.”