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By Nadia Papagiannis, CFA | 09-21-2009 05:26 AM

Investment Case for Alternative Funds

Rick Lake of Aston/Lake Partners LASSO Alternatives Fund says alternative funds offer investors more tools to turn risk up and down.

Nadia Papagiannis: Hello, my name is Nadia Papagiannis. I'm an alternatives analyst here at Morningstar.

Today with me I have Rick Lake, co-founder of Lake Partners and manager of the Aston/Lake Partners LASSO Alternatives Fund, which is a fund of all alternative mutual funds.

Lake Partners has been on the forefront of using mutual funds with alternative strategies, and LASSO, or the Long and Short Strategic Opportunities strategy, has been around since 1999, which is a lot longer than a lot of alternative funds out there.

Lake Partners, in fact, has been consulting on alternative strategies since 1989, so this is their 20th anniversary.

Rick, thanks for being here with us today.

Rick Lake: Delightful to be here.

Papagiannis: While we've seen the number of alternative mutual funds pretty much explode in recent years, I was wondering if you could tell us both the regulatory impetus for this and also the investment case for all of these alternative funds.

Lake: Well, the investment case goes back quite a way. Mutual fund managers, to a very limited degree, tried to incorporate short selling, and option hedging, and alternative strategies for quite a while.

But the freedom to do it really did not occur until 1997, when Congress repealed an old tax law called the short-short rule, which used to limit the amount of short-term trading, including short selling, that a mutual fund could do. Once this rule was repealed, it allowed those mutual funds that were short selling or using other alternative strategies to do it even more. In 1998, we saw the creation of the first wave of dedicated long-short and alternative mutual funds.

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