Investors are being guided (some say pushed) into alternative investments at the wrong time. Many of these alternative investments are recommended by investment advisers. Many of these advisers have come to believe that they can cater to their client’s instincts to avoid equities by recommending alternative funds that use hedge fund-like strategies or watch client money go out the door.
According to John Waggoner (USA Today), investors’ fear and loathing of the stock market has resulted in $182 billion in outflows from actively managed stock mutual funds since the bottom in March 2009, and record inflows into various alternative investment mutual funds (“Funds craft lures for skittish investors”). There have been two bear markets since 2000 and the S&P 500 stock index is almost 10 percent lower today than it was in 2000. Investors have not forgotten and are desperately exploring viable investment options.
Unfortunately, investors have been misled into believing that alternative funds will deliver short-term positive returns in any type of market conditions. They include “long-short” funds, which both buy some stocks and sell other stocks short; volatility funds, which bet on how violently the market lurches in one direction or the other; bear funds, which sell short in the belief that markets will fall in the short term; and absolute return funds, which speculate in risky securities like commodities, foreign currencies, and emerging markets.
In the past 12 months, however, the S&P 500 has returned 4.6 percent, but market neutral funds are down 1.4 percent, long-short funds are down 2.7 percent, currency funds are down 5.4 percent, and multi-alternative funds are down 2.6 percent, according to the article, citing Morningstar.
Investor attorney J. Boyd Page of Atlanta-based Page Perry observed: “These alternative funds are the wrong investment at the wrong time. Alternative funds have high expenses, use unproven investment strategies and are difficult for investors and advisers to understand. They are certainly no panacea to market volatility and low investment returns, as they have been portrayed by some in the securities industry. Investors would be well-advised to think twice before investing in them.”
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.