Alternative mutual funds are a type of investment vehicle that allow you to invest in nontraditional securities, such as real estate, commodities, and leveraged loans.
These mutual funds can be a useful tool for diversifying your investment portfolio, but they may not be suitable for everyone.
To determine if alternative funds are right for you, it is important to do your research. Look into the investment strategies of the fund and the types of securities it invests in. Consider your own investment goals and risk tolerance, as well as any fees associated with the fund.
While alternative funds can be a smart way to gain access to nontraditional investment opportunities, they should be approached with caution.
By doing your due diligence and carefully considering your options, you can make informed decisions about alternative funds and their potential role in your investment portfolio.
Understanding Alternative Mutual Funds
The term alternative mutual funds typically refers to mutual funds, hedge funds, or ETFs that invest in non-conventional investment securities. Non-conventional investments are broadly categorized as securities other than stocks, bonds, and cash.
Alternative mutual funds are typically invested in leveraged loans, real estate, commodities, and unregistered securities such as jewelry or artwork.
While these investments can offer diversification benefits and potentially higher returns, they are also associated with higher risk and volatility than traditional investments.
Investors interested in alternative mutual funds should carefully evaluate the risks and benefits of these investments and consider whether they are appropriate for their investment goals and risk tolerance.
Additionally, it's important to conduct thorough research and work with a qualified financial advisor to identify specific alternative mutual funds that align with your investment strategy.
Benefits of Alternative Funds for Diversification
Alternative funds are often used by investors as a means of diversifying their investment portfolios. This is due in part to the fact that the performance of alternative investments often has a low correlation to the broad market indexes, like the S&P 500.
Some alternative funds have a narrow focus on specific investment strategies, such as commodities, while others may invest in a range of alternative investments. For example, alternative funds may invest in securities that are not easily understood, such as derivatives, currencies, or distressed bonds.
Additionally, alternative funds may seek to achieve returns that are higher than market averages, or they may aim for "market neutral" or "absolute returns" by using both long and short strategies.
By diversifying their portfolios with alternative funds, investors may be able to reduce risk and potentially increase returns, making these funds an attractive option for those looking to expand their investment horizons.
What to Consider Before Alternative Mutual Fund Investing
Investing in alternative mutual fund strategies can offer a diversification of your investment portfolio. However, before applying this strategy, there are several points to consider:
Market Risk
As alternative mutual funds are invested in non-conventional securities, investors need to be aware that price fluctuations can be larger than conventional securities such as bonds or stocks.
Expense Ratio
Due to their nature, alternative mutual funds tend to have higher expense ratios than most mutual funds and ETFs. For example, management fees can be higher due to the need for more complex and extensive research and high trading levels compared to the average actively managed mutual fund.
Structure
As alternative mutual funds usually do not have a clear legal structure, the contents of the investment portfolio may not be clear to investors. Do your best to understand the purpose and ownership of the fund. Investors should also understand how ownership works and how it functions in the capital markets.
Mutual Fund Manager
As most alternative mutual funds are actively managed, it is important to know the mutual fund manager's track record. Make sure that the manager has years of experience and a performance track record related to alternative mutual funds.
Performance History
Past investment product performance is not a guarantee of future results. However, the history can provide an idea of what is expected from the mutual fund.
Look for mutual funds with long-term returns, at least 5 years. Avoid mutual funds with short performance history. Be careful with investments in alternative mutual funds that have large swings in performance.
Minimum Investment
Many alternative mutual funds require a minimum investment at the beginning, perhaps hundreds of millions or more.
Bottom Line
While alternative funds can be an attractive option for investors looking to diversify their portfolios, it is important to note that they are not suitable for everyone. Alternative funds may come with high market risk, high expenses, and high minimum initial investments.
If you are looking to diversify your portfolio, there are other options available as well. One approach is to build a portfolio with funds in different categories, capitalization, and assets, or to diversify in focused areas, such as specific industrial sectors.
Another option is to choose mutual funds or ETFs that incorporate alternative securities or strategies into your portfolio.
It is important to note that alternative funds are not necessary for achieving returns that exceed broad market averages.
However, if you choose to invest in alternative funds, be sure to exercise caution and thoroughly research the funds before investing.