| NEW YORK, June 18
NEW YORK, June 18 Investment advisers, bracing
for the U.S. Federal Reserve to raise interest rates, are
seeking alternatives to plain-vanilla bond funds, and some are
turning to mutual funds that employ hedge-fund-like tactics,
including the ability to bet against securities.
After record annual inflows exceeding $40 billion in 2013,
the appetite for U.S. alternative mutual funds, also known as
hedged mutual funds or liquid alternatives, has been insatiable.
Demand has grown $13.5 billion this year through May, nearly 9
percent of their $154 billion in total net assets, according to
"Every hedge fund firm is working on a liquid alternative
product," said Nadia Papagiannis, director of alternative
investment strategy for global third-party distribution at
Goldman Sachs Asset Management. "I wouldn't be surprised, if we
had a shock to the system, that we would see unprecedented
inflows into alternative mutual funds," she said.
Many investors are worried that bond yields will spike and
prices will fall once the Federal Reserve ends its massive
bond-buying program and raises interest rates. His concern has
led many into alternative mutual funds, which can use hedge fund
techniques to protect against market losses.
"With the risk of bonds higher today than it has been in the
past, fixed-income isn't likely to play that same risk reduction
role in a portfolio," said Ann Marie Etergino, an adviser at RBC
Wealth Management. Alternative mutual funds "help to fill that
gap," she said.
Alternative mutual funds can mimic hedge funds through
strategies such as shorting various assets but must comply with
mutual fund regulations such as a roughly 33 percent limit on
leverage, or borrowed cash, and a maximum 15 percent exposure to
Examples include the AQR Long-Short Equity Fund,
Blackstone Alternative Multi-Manager Fund, and the
BlackRock Global Long/Short Credit Fund.
While the rush into the funds has continued this year
through May, the $229 billion Pimco Total Return Fund and the
$72 billion Templeton Global Bond Fund, the two largest
actively-managed bond mutual funds, have posted outflows of
nearly $16 billion and $745 million over the same period,
respectively, according to Morningstar data.
Many advisers said they had boosted their stakes in
alternative mutual funds to 5-10 percent of client portfolios in
"We're reviewing everything," said Joseph Matina, a private
wealth adviser at UBS, on the various funds available.
NOT STRESS TESTED
Risks to alternative mutual funds include patchy performance
across different fund types and short track records.
Long/short equity funds, which can bet both on and against
stocks, have been the most popular alternative mutual funds this
year with inflows of $8.5 billion through May. The funds gained
nearly 15 percent last year and are up 1.7 percent this year
through May, according to Morningstar.
Managed futures funds, which mainly invest in listed or
privately traded derivatives such as swaps and futures, fell 0.9
percent last year and are down 1.5 percent this year through
Of the 474 alternative mutual funds, 233 have been launched
in the past three years, according to Morningstar. Most launched
after the 2008 financial crisis, "which makes it hard to tell
whether or not they will survive the next major crisis," said
Michael Beriss, a private wealth adviser at Ameriprise
The U.S. Securities and Exchange Commission is examining
about 25 investment firms to determine whether certain
alternative mutual funds are complying with mutual fund rules on
liquidity, valuation and leverage.
"The biggest risk is underperformance," said Josh Charney,
alternative investments analyst at Morningstar.
(Reporting by Sam Forgione)