With interest rates rising, many fixed-income investors are looking for alternatives to traditional bond funds. In her Wall Street Journal article, “Are ‘Alternative’ Bond Funds Safe?” Eleanor Laise makes it clear that they are not safe. Rather, she describes how they use complex “hedge-fund-like tactics,” such as derivatives, credit default swaps, interest rate bets, currency bets, and rapid in-and-out trading, to try to achieve “amped-up” returns. In addition to the increased risks, they come with increased fees and expenses that effectively require managers to take more risk to achieve the equivalent return of an investment with lower expenses. Also, many of them lack a significant track record.
According to the article, the average intermediate term bond fund charges expenses of 0.95% of assets, while the Bandon Isolated Alpha Fixed Income Fund (with only a few months of operating history) charges 1.95%, and the Driehaus Select Credit Fund charges 1.75%. Other funds mentioned in the article are the Eaton Vance Global Macro Absolute Return Advantage A Fund, the Loomis Sayles Absolute Strategies A Fund, the American Independence Absolute Return Bull Bear Bond Fund, and the Rydex SGI Long Short Interest Rate Strategy Fund.
While some of the funds have performed well, according to the article, the risks and relatively high expenses make them unsuitable for many income-oriented investors. Firms that sell these and other investment have legal obligations to make a fair and balanced presentation of the risks and benefits in advance of the purchase. In our experience, however, the risks of complex, new investments are usually not as well-explained as the possible benefits.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.