The alternative asset class has become increasingly popular for investors looking to generate additional sources of return uncorrelated with equities and bonds. Investment research house van Eyk says the better alternative funds have been successfully delivering on their promise to improve portfolio diversification and protect investors from falls in equity markets.
The popularity of alternative assets has increased globally, with pension funds increasing their allocation to alternatives from 5% to 20% between 2005 and 2011. Van Eyk head of manager research and deputy CIO Matthew Olsen said funds in this sector rated highly by van Eyk received their rating partly due to their ability to protect investors from equity market falls and produce absolute returns.
He said planners needed to analyse in detail the correlation performance of investments versus equities. "In the long term you need something with a low or negative correlation, when needed, to equities, so that's really something an adviser should look for."
An example given by van Eyk is the Aspect Diversified Futures Fund. The fund is a CTA or Managed Futures strategy which seeks to exploit returns in alternative asset classes (chiefly hard and soft commodities but also bonds and currencies) when equity markets are volatile.
On the basis of five-year rolling returns, the fund has outperformed the ASX200 index 70 to 80% of the time. During the period between the top of the Australian equity market in 2007 and the bottom of the bear market in March 2009, the strategy outperformed equities by 70%.
Olsen said it was important when examining these funds to look at them over the 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 said. “This does a great disservice to investors who have the right approach and try to invest for the long term.” He suggests investors look at alternatives in the three to five year term.
But, it was vital to have the expertise to sift the better funds from the rest, perhaps more so than traditional asset classes because of the relative complexity of some investment strategies. “More managers are seeking to enter this space but van Eyk recommends only the cream of the crop,” Olsen said.
Van Eyk has just released an additional 10 fund ratings in the alternatives sector, identifying a further five A-rated managers covering the absolute return, commodities and global macro sectors. They have now rated 45 managers, with about a third receiving A or AA ratings.