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By Mallory Horejs, CFA | 06-21-2012 05:00 PM

Why Alternatives Investors Should Target Minimum Allocations

Van Eck's David Schassler focuses on multialternative strategies for his clients and says any alternative allocation lower than 10% enters into 'why bother?' territory.

Mallory Horejs: Hello, my name is Mallory Horejs, and I am an alternative investments analyst here at Morningstar. I am at the Morningstar Investment Conference, and today with me I have David Schassler, director of manager research at Van Eck. David thanks for joining us today.

David Schassler: Thank you very much.

Horejs: So liquid alternatives have been a very hot topic at the conference this year, as they were last year. Our director of alternatives research Nadia Papagiannis led a very engaging panel on managed futures which continues to be growing area. But I'd also point out multialternatives continues to be a big growth area, as well. It's our largest category. Now there are more than 80 funds, and that’s what Van Eck specializes in. So could you tell us a little bit more about your fund and why you decided to go this multialternative route as opposed to single-manager strategy?

Schassler: Sure, so we are a multimanager alternatives fund. What we do, is we go out and we find managers that we believe are best of breed within the hedge fund community and bring them into the 40 Act structure where we can. So it has to be managers that are investing in publicly traded securities, liquid strategies that can provide us with the transparency and liquidity that we need. The reason why we focused on multistrategy as opposed to single strategy is really to be a core allocation for retail investors.

We recognize that there are so many different offerings out there within the alternative genre. So how do investors go about picking the best funds? Well first off how do they go about figuring out which assets to invest in? So which strategies to invest in and then which funds to invest in?

It basically outsources the investment due diligence to us. It allows us to go out there and sit down face to face with these managers, figure out who has the best most consistent repeatable process, and then bring everything together into a portfolio context. What we do is we manage not only the volatility but the beta. So we manage the volatility to a range let's call it 4% to 7%, and the beta to 0.2 to 0.35, and this is relative to the S&P 500.

Horejs: In addition to those hedge fund managers you are using I also know that you look at mutual funds, ETFs. The fund has very broad mandate. Could you provide an overview of manager search and selection process, what factors are most important to you?

Schassler: First off it's quality of strategy. Let's figure out which strategy that we think makes the most sense and which is best-positioned to outperform and then secondarily we'll figure out how can we access this strategy and which vehicle is the most prudent. So in regards to our invest search and selection process. It really begins with a screening process.

We have a very large database of hedge funds. What we'll do, is we'll screen the entire database so let's say for example we are looking for a managed futures fund. We'll go out screen the universe and will narrow the universe down based off our desired risk and return attributes. So we are looking for again consistent returns. We are not looking for outliers either on the upside or the downside. But up-the-middle managers that have proved over a long time period the ability to outperform. But that’s just the returns, and that’s really where the hard work begins. Because what we do there is we speak with every manager and do a lot of homework and a lot of return-space, holding-space analysis. What we figure out is whose investment process and philosophy is most aligned with our current thinking. And then we get on a plane and sit down face-to-face with these managers, and it's basically a day in their life.

It's an in-depth fundamental research process, that relies on us basically sitting there with the manager and going through each piece of their investment process and figuring out does this make sense to us or not? And it’s a lot of questions; it’s a lot of prodding. If you kind of think about it from our standpoint, we are pulling threads, and we are asking targeted questions to figure out, is this the best manager we can possibly find to manage a sleeve of assets for us because our mandate is so broad, that we can go out and hire virtually anybody. So its figuring out who do we think is the best.

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