Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.
According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed—because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.
Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.
These complex investments also can be expensive. Morningstar, an independent investment research firm, says that they cost on average approximately 1.77% of assets.
"Wall Street burns the midnight oil putting together 'products' to sell to Mr., Miss and Mrs. America,” said Shepherd Smith Edwards and Kantas, LTD LLP Founder and Stockbroker Lawyer William Shepherd. The goal is not to serve the best interest of the investor but simply to make a sale. The perfect product is one that sounds great to untrained ears (including the untrained ears of salespersons) and generates a fat hidden commission. Some call such 'products' innovative, others correctly call them gimmicks."
In 2013 alone, 55 new alternative funds have been ushered in, which means that there are now 400 such funds. Blackstone Group, AQR Capital Management and other big hedge fund players are beginning to offer alternative mutual funds to “regular” investors—something that isn’t possible with hedge funds, because individual investors have to be accredited with an income of at least $200,000 and over $1 million in assets.
Meantime, Forbes just reported on two studies on retail investment alternatives. Both found that the growth trend with these investmentss is likely continued. Strategic Insights and Cerulli Associates conducted the studies.
Our alternative mutual fund lawyers represent investors that have sustained losses due to financial adviser fraud. Contact Shepherd Smith Edwards and Kantas, LTD LLP today. Your case consultation with our securities lawyers is free.
Retail Alternative Investments - The Good, Bad And Ugly, Forbes, October 25, 2013
An Intriguing Product That’s Too Complex for Many, New York Times, October 26, 2013
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