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By Nadia Papagiannis, CFA | 06-14-2013 12:00 PM

Alternative Returns Are in the Right Ballpark

Hitting singles and doubles is the way alternatives should play the game, and investors should not expect a gain of 20%-30% from these vehicles, says Alpha Capital manager Brad Alford.

Nadia Papagiannis: Hello, my name is Nadia Papagiannis. I am the director of alternative fund research at Morningstar. Today, we're here at the Morningstar Investment Conference with Brad Alford, manager of Alpha Opportunistic Growth, ACOPX, and Alpha Defensive Growth, ACDEX.

Brad, thank you so much for being here with us today.

Brad Alford: Thank you, Nadia.

Papagiannis: Brad, we're here with a lot of advisors [at the conference], and there seems to be a lot of confusion as to what to do in these markets. It's a very volatile time. Bonds are down. Emerging markets are down. The only thing that seems to be up is stocks. What do you think is the biggest challenge for advisors these days?

Alford: It's definitely, I think, the fixed-income portfolio. A typical advisor would be 60% equity and 40% fixed income, and in the first time in 30 years, it looks like interest rates may finally be going up and staying up. There was a head fake in January, but they came back down again. But it seems to be a movement of higher rates, and advisors are very nervous about that right now.

Papagiannis: Some of the things that they've done to hedge higher rates--maybe they were in emerging-markets currencies; that didn't pan out. What are some alternatives to hedging fixed-income risk or the risk of rates rising?

Alford: It's a great question because now there are managers who go long and short bonds will actually bet that interest rates will rise and go negative duration [a measure of interest-rate sensitivity]. There are ways to actually make money in a rising-interest-rate environment, which is unique and that's where you go into the alternative categories, and the nontraditional bond managers that you cover do a great job. But there are ways to make money in a rising-interest-rate environment. I think advisors probably don't know that and they should look into that.

Papagiannis: Your Defensive Growth fund is meant to be a bond substitute. What kind of managers do you have in there?

Alford: We're running a portfolio that we want bondlike volatility, so a 3%-4% standard deviation. But we don't want this high correlation to bonds, or if interest rates rise then we try not to lose money. We have a lot of managers that are long-short credit. We have managers that are long-short currency, who do merger arbitrage. We have some commodities exposure in there, some convertible arbitrage. Really the strategies are long and short and not just pure long-only strategies.

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