Alternative choices

Peter Freeman looks at less common ways to diversify

Peter Freeman

GETTY IMAGES

THE IMPORTANCE OF ASTUTE diversification was the focus of last month’s Savvy Investor and so it is again in this issue. But whereas the previous analysis looked at adding diversification via a range of income-generating investments, the focus here is on so-called alternative investments.

While sometimes described as consisting of all those investments other than mainstream shares, property, fixed income securities and cash, this definition casts the net a bit too wide.

For most individuals it is likely the main alternative investment options are hedge (or absolute return) funds, managed futures funds, private equity funds and, in general, managed funds that themselves invest in unusual assets.

Certainly a recent study of alternative investment funds by local research firm van Eyk focused mainly on managed funds that make use of absolute return strategies, managed futures and so-called “global macro strategies”.

Most hedge funds ignore investment benchmarks and instead use a range of complex trading strategies in an attempt to deliver a positive – or absolute – return in all investment climates.

Managed futures funds are those where the manager uses futures contracts and other derivatives to take long and short positions over a range of assets including currencies, interest rates and commodities.

Global macro strategies involve using broad economic and political analysis to help make and manage large and often very diverse investments throughout the world.

When releasing some of its findings, van Eyk argued that including alternative assets in a balanced portfolio is increasingly being recognised as a way to add an additional earnings source that is uncorrelated with shares and bonds and which, if successful, will enhance long-term returns.

Matthew Olsen, van Eyk’s head of manager research, says the emphasis should be put firmly on “long term”.

“I have seen some analyses of these types of funds which try to assess them over time periods as short as 12 months,” he says. “This does a great disservice to investors who have the right approach and try to invest for the long term.”

In line with this, the alternatives fund publicly endorsed by van Eyk – the Aspect Diversified Futures Fund – suggests that investors should have a minimum investment time frame of seven years.

The fund, which is managed out of London by Aspect Capital and has been distributed in Australia by Colonial First State since early 2010, returned 15.86% in 2010 and 10.09% in 2011, but last year delivered -6.94%. That an alternatives fund might underperform during a time when mainstream shares rise strongly is not unusual since, as noted already, their returns tend to be uncorrelated with mainstream markets.

In the past, the Aspect fund has also been positively reviewed by two other research groups, Lonsec and Morningstar. Both these research groups also reported positively on the BlackRock Scientific Global Markets Fund (APIR code: BGL0045AU), Fauchier Partners Absolute Return Trust (ETL0144AU) and Winton Global Alpha Fund (MAQ0482AU).

The second of these is distributed in Australia by Equity Trustees, while the third is distributed by Macquarie.

Only the Winton fund, which has a minimum investment of $20,000, is open to direct retail investments. The other two are available only through investment platforms.

The Aspect fund can be accessed directly either through Colonial First State’s FirstChoice platform (FSF1081AU), which has a $5000 minimum investment, or directly by investing in what is termed its Class A units (FSF1086AU), whose minimum is $25,000.

But before investing in one or more of these funds, or in any of their direct rivals, it is crucial to understand, among other things, their fees (they generally charge a performance fee and are relatively expensive) and the strategies they use.

As noted, the Aspect fund makes use of managed futures strategies, which is also the case with the Winton fund. The Fauchier Partners fund operates as a fund of hedge funds – that is, the fund invests in hedge funds – while the BlackRock fund uses a global macro strategy.

Welcome!

Magazines Review offers you a broad range of popular American magazines online. Browse an extensive directory of magazines, covering most important aspects of your life. Find the most recent issues of your favourite magazine, or check out the oldest ones.

About content

All the articles are taken from the official magazine websites and other open web resources.

Please send your complains and suggestions through our feedback form. Thank you.