Alternative Investments – Are They All They Are Cracked Up To Be?


Rising interest rates may be death to traditional bonds and bond funds, but a number of alternative investment strategies allegedly designed to protect principal in a rising interest rate environment are springing up to take their place.  It remains to be seen whether they will provide ballast when bond prices fall.

For decades, bond investors were able to pursue income, appreciation and preservation of capital all at once, but that is not possible any more, according to BlackRock’s chief investment strategist, Jeff Rosenberg. He says that investors must now choose which of the three is most important to them (“The Bond bomb survival guide,” by Jeff Benjamin, InvestmentNews).

“The bond market offers you different mixes of liquidity, term, credit, currency and interest rate exposure, and the key for any investor is to understand where they stand in this mix and how it is likely to behave under different market conditions.  The important reality to remember is that the global bond market is far from homogeneous,” PIMCO co-manager Mohamed El-Erian was quoted as saying.
In general, alternative bond funds are holding fewer Treasury securities, more corporate and mortgage bonds, and shorter-duration bonds.

One alternative strategy is “go anywhere” bond funds.  There are $66 billion of such funds that bear no restrictions on credit quality, geography and duration.  But there is not much of a track record. Almost 63% of the “go anywhere” bond funds followed by Morningstar are relatively new, having been launched since 2009.

Still another alternative strategy is an updated variation on the traditional bond ladder.  Yesterday, investors built bond ladders – bond portfolios with staggered maturity dates – out of individual bonds.  Today, ETFs may hold a basket of corporate bonds that mature on a specific date, so investors can use them instead of individual bonds for their ladders.  In theory, investors can reduce both interest rate risk and credit risk in this way.

Regardless of what alternative strategy is recommended, investors should be wary and ask lots of questions.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.