Liquid-alternative funds are increasing rapidly in popularity, with investors pouring $40 billion into them in 2013, according to Morningstar. This year through June, they have taken in $14.6 billion.
“Liquid alternative” mutual funds typically service hedge-fund-like strategies but don’t come with the same limitations. There isn’t a high investment minimum, for instance, and the funds aren’t as challenging to exit as traditional hedge funds.
Fund companies are offering investors a chance to capture at least some of the upside of stock returns in good markets while offering protection in down markets and diversifying portfolios.
Doubters say the strategies often are too complicated for the typical investor to understand, and many are too new to have a proven track record. They also come with high fees: an average of 1.9% of total assets, or $190 per a $10,000 investment, compared with 1.2% for a usual actively managed stock mutual fund and 0.6% for a stock index fund, according to Morningstar.
“They have some ugly baggage and warts they carry,” says Mark Balasa of Balasa Dinverno Foltz in Itasca, Ill., a wealth-management firm with $2.8 billion in assets under management. “Advisers are challenged to understand what they do, let alone investors.”