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Alternative Funds That Add Diversification

Interest-rate fears and potential tapering of the Fed's bond buys could put these diversifying offerings on investors' radars.

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At a time when correlations have increased among many asset classes, finding investments that provide true diversification can be a challenge. 

A takeaway from the market collapse of late 2008 was that even a diversified portfolio of equities can get hammered in an environment when investors are fleeing riskier asset classes. While the S&P 500 index of large and mid-cap companies lost 37% that year, small-cap stocks lost about the same amount, and foreign and emerging-markets stocks lost even more (43% and 53% respectively). However, during this time high-quality bonds proved their mettle as diversifying investments--the Barclays U.S. Aggregate Bond Index of investment-grade U.S. bonds gained 5% on the year. But today, with fears of rising interest rates and a pullback of the Fed's asset purchases, many investors might be looking for alternative tools of diversification.

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Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.