Compelling liquid alts strategies are in short supply, but we've identified several new Morningstar Medalists in recent months.
We have added several Morningstar Medalist alternative-strategy funds to our coverage since the autumn of 2016. That's not an easy bar to clear, as when it comes to alternatives, we tend to view new funds with a skeptical eye. They're often overpriced, and frequently the strategies, while intriguing, are untested or lack transparency.
The funds described below come from four different Morningstar Categories: market neutral, long-short equity, option-writing, and multialternative. While they represent different strategy types and are new as mutual funds, a common thread for the funds earning medalist Morningstar Analyst Ratings is experienced management teams with specialized expertise running the strategies that power these funds. Given the complexity and technical difficulty of executing many alternatives strategies, veteran and accomplished management is critical. Also noted are two recently added Neutral-rated funds that have some positive characteristics but also drawbacks that keep them from rising to medalist status.
AC Alternatives Market Neutral Value ACVQX
American Century is not a firm historically known for its alternatives offerings, but recently it has begun to build out that portion of its business under the direction of Cleo Chang, formerly of Wilshire. But this closed fund is no neophyte: It's run by veteran value manager Phil Davidson, who follows the same fundamental stock-picking process used at his long-only value strategies. Davidson's basic process for this fund, which has been around since October 2011, is to construct pair trades (buying one company while going short the other) of highly correlated businesses that he believes have temporary price dislocations. The team works from a limited pool of about 500 companies that meet its quality criteria, rather than attempting to short the junkiest stocks. The strategy is also differentiated by its fundamental approach, as many market-neutral funds favor quantitative models. The fund has maintained a beta to the S&P 500 of close to zero over the past three years while hitting its target of 3%-4% returns annually.
Abbey Capital Futures Strategy ABYIX
Abbey Capital is a name probably not familiar to many investors in the United States. But the Dublin-based firm has been running managed-futures strategies in private fund formats since 2000 and now has $2.7 billion under management. The firm uses a multimanager approach, allocating capital to external subadvisors. Whereas the firm's flagship private fund uses 22 subadvisors, the mutual fund, Abbey Capital Futures Strategy, allocates to nine.
The fund features both an experienced management team and a detailed investment process. Managers Tony Gannon and Mick Swift lead both this fund and the private fund; they have more than 20 years of experience in the industry, including 14 years at Abbey Capital. Unlike some managed-futures peers, this fund is not a pure trend-follower. It aims to produce a return stream uncorrelated to stocks or bonds by allocating 60% of its assets to systematic trend-following subadvisors and 40% to diversifying strategies such as short-term trading, systematic macro, and/or relative value. This may make the fund more resilient in periods when there are few trends to latch on to. The fund's fees are above average, but the firm is transparent with its fee structure and does not include performance or swap fees.
JPMorgan Hedged Equity JHQAX
This fund falls into the option-writing category, a new alternatives category created by Morningstar in 2016. Managers Hamilton Reiner and Raffaele Zingone run a long equity portfolio that replicates the S&P 500 and collar that portfolio with an option overlay. The fund differs from a typical collar strategy, which involves selling calls and buying puts against a long equity position. Instead, this fund constructs a put spread--which entails buying puts at one strike price and selling them further out of the money--in order to protect the fund from market sell-offs in the range of negative 5% to 20%. However, the fund could be exposed to bigger losses if the market were to drop further than 20% in a severe crash. Under normal circumstances, though, the fund should have performance characteristics similar to a 60/40 balanced portfolio. Reiner's extensive experience with options and derivatives is a plus, as are the fund's competitive fees, which are 0.85% for its A shares.
Boston Partners Global Long/Short BGRSX
Boston Partners has been one of our favorite alternatives firms for a while because of the focus and success of its approach (fundamental long-short equity investing with both longs and shorts producing alpha) and its concern for preserving return potential by closing funds before they become bloated. Boston Partners Global Long/Short is a newer fund, having launched in January 2014, but it follows the same approach of the firm's flagship Boston Partners Long/Short Research BPIRX--a Silver-rated fund that's closed to new investors. Boston Partners Global Long/Short applies the firm's investing framework to a global universe of stocks, and it is open to new investors.
Jay Feeney, the firm's CIO, is a named manager on the fund, but the key day-to-day managers are Chris Hart and Josh Jones, previously long-tenured analysts at Boston Partners. Three other dedicated analysts work on the fund, and they also rely on the firm's wider research team. The core of the process is the firm's "three circle" approach to investing, focusing on valuation, business fundamentals, and business momentum. The fund allocates approximately 50% of its assets to non-U.S. stocks, and it maintains a 100% static long exposure with a fluctuating short exposure of 30% to 70%. The average net long exposure is 40%. Expenses are above average--an issue with most of the Boston Partners long-short funds—but few liquid alts firms have performed as consistently as this one.
Gabelli ABC GABCX
Mario Gabelli has been running this merger-arbitrage fund since May 1993, making it one of the longest-tenured such vehicles in the market-neutral category. The strategy relies on Gabelli and his analysts' expertise in valuing companies, focusing on announced deals with a special emphasis on small- to mid-cap companies, which differentiates this fund from some other merger-arbitrage strategies. Management will also sometimes invest in event-driven situations such as spin-offs, split-offs, and leveraged-buyout transactions. Gabelli's experience and knowledge are a plus, but the process lacks the defined structure and transparency of some peers. In addition, the key-man risk associated with Gabelli at both the fund and firm level raises additional concerns. The fund is priced competitively, however, with a 0.59% net expense ratio for the AAA share class and 0.84% for the Advisor shares.
Goldman Sachs Multi-Manager Alternatives GSMMX
This fund is one of a slew that brought fund-of-hedge fund strategies to the mutual fund marketplace in recent years, using managed-account structures to access portfolios subadvised by hedge fund managers. In some cases, these strategies are modified to fit the leverage and liquidity requirements of mutual funds, while in other cases they require no changes at all. One of the big advantages this fund brings to the table is Goldman Sachs' extensive history researching and investing in hedge funds; the firm's 12-person alternative investments and manager selection (AIMS) committee is largely responsible for running this fund, using the same personnel and process it uses for hedge funds. The fund currently allocates to 10 subadvisors across four of six available strategy areas: equity long-short, event driven and credit, tactical trading, and relative value. The departure of a key senior manager in 2016 and high fees (2.11% for the institutional shares, 2.51% for the A shares) are among the cautionary factors keeping the fund's Analyst Rating at Neutral.