The securities industry has for several years now been struggling to adjust to a period of prolonged lackluster economic growth, very low interest rates, and a mortgage securities market dominated on both the issuance side (GNMA-FNMA-FHLMC) and the investment side (the Federal Reserve and QEI, QEII and QEIII) by the federal government. Given that several traditional sources of revenue have been down, over the past few years Wall Street has been cobbling together alternative investment products and services to sell to the public. Fast forward to today and the securities markets are now awash in hundreds of billions of such alternative products, packaged and sold under a name evidencing the haste with which they have been created: ‘alternative investments.’
Alternative Mutual Funds
Alternative Mutual Funds can be publicly offered, SEC registered funds that do not follow the typical mutual fund strategy of buying, holding and selling stocks or bonds. Rather, these funds may invest in any number of a wide variety of assets such as commodities, currencies, or start-up companies. Other funds may be designed to pursue a particular ‘strategy’ with a very vague, but official sounding name such as “long/short”, “global macro” or “managed futures.”
We see several common issues with many of these funds
1) The fund has very little performance history
2) The strategy is very, very ill-defined to the point of being truly a ‘just trust us’ deal
3) It is very unclear the exact experience the investment managers have had in the exact asset-types or strategy on which the fund will focus
4) The funds are more expensive than conventional mutual funds, with typical funds charging at least 1.5% per year.
In addition, while these funds sell themselves on the promise of innovation and market beating returns, the fact that they have appeared en masse, we believe, gives reason to be skeptical about that claim. Moreover, Wall Street being what it is, many of these funds are bound to be set-up to take the wrong side of the bet that the powers that be really want to make.
To learn more about Chris Donnelly, visit Ledbetter & Associates.