Alts: Taking the Plunge, Dipping a Toe, or Taking a Pass?

This week, we were curious to hear about our readers' experience with alternative investments. To find out more, we asked readers if they've ever invested in an alts strategy--such as a fund that follows a long-short, market-neutral, managed-futures, or currency strategy--or any other investment that they consider "alternative."

We deliberately left the definition of "alternatives" a bit open-ended. As you might imagine, some readers' interpretations of what an alternative is did not jibe with others'. As treasur2 succinctly put it, "the definition of 'alternative' is in the eye of the beholder (investor)."

Some readers said that while they like the idea of alts and are intrigued by their lower correlation with more traditional asset classes, they're hesitant because they feel the strategies are too hard to understand and their fees are too high. "I do like the real-return concept behind some of the alternative funds, particularly in the current market environment, and while some of these funds are good diversifiers in theory, I have yet to find more than a couple where the combination of performance (usually iffy) and cost (usually excessive) adds up to something worth considering," said mwleach.

But many others had taken the plunge into alts--with varying degrees of success. They shared their outcomes and, in many cases, also discussed what they have learned. To read the full thread and weigh in yourself, please click here. (Also, if you're interested in engaging in further discussions about investing in alts, check out our Alternative Investments Discuss forum on Morningstar.com.)

'Yes or No, Depending on Your Definition of Alternative' Tomas47 has previously and/or currently invested in many types of alts, if one defines "alternatives" according to the categories in Larry Swedroe's The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly: "In [Swedroe's] 'Good' grouping, I include REITs, TIPS, international equities, and stable-value funds. ... In the 'Flawed' group, I have dabbled in precious-metals equities in the distant past."

"TIPS and REITs. It's been great. Most alts are too expensive," said Oleyeller.

An interesting viewpoint was provided by DrBobb: "My only alternative has been my son-in-law's heating and air-conditioning business. It has been an excellent alternative. I avoid the high-priced, unproven, off-beat stuff Wall Street sells."

Chief K

has an allocation to REITs and TIPS in a Roth account. "Plus in my case,

Bob765

, who has been busy researching and investing in alternatives, has 7% of an IRA devoted to William Blair Macro Allocation WMCNX,

bob765

.

Gatorbyter shared some perspective gained through experience with peer-to-peer loans. "What I find particularly appealing about P2P lending is that the account balance has almost no volatility, so it's a good counterbalance to some of my other high-yield fixed-income investments, which are often quite volatile."

Yogibearbull invests in the TIAA Real Estate Account, commodity producers, and managed-futures funds. However, Yogi adds: "I gave up on long-short funds--they behaved similar to moderate-allocation funds, so why pay high expense ratios for L-S funds?"

'Yes, With Less-Than-Stellar Results'

"I have made small gains with the Merger Fund, but both

ThinkingofLTCI

. "I've held onto them only because they represent a very small percentage of our portfolio. If you were to include

Racqueteer has also dabbled in alternatives and lists four factors for consideration, including momentum and clear trends (such as a strong dollar). "Didn't work out as great as it might since I move slowly (too slowly, as it turned out), but I'm still positive for the year despite CEFs hurting me some on total return. Overall, I'd say I'm sort of winning!"

"I started out investing only in alternatives--collector's coins--and did very well from about 1975 to 1980 when the market for coins went to the moon. When it collapsed, I lost everything and it took me until 1987 to finish paying off my debts!" said rmhcpa. "The proper role for alternatives in a stock portfolio is as a diversifier, and in small quantities."

Counterpoint

also invests in an alts strategies and reports that performance has been "unremarkable." "I've been invested in

'Nope!!! I Don't Invest in Things I Don't Understand!!' Carman, who made the decision to pass on a managed-futures strategy, has this to say: "I didn't buy it then and I don't buy it now since I'm retired and have enough assets to carry me over without taking large unnecessary risks on things I don't understand."

"I have a long list of realized losses from 'long-short' and 'market-neutral' funds," said Jadster35. "Balanced funds will almost always trump alts over time."

"I used to work at a firm and saw five or six of them blow up," said andymoler58. "They are by far the worst investment out there. You should just buy a house instead because the illiquidity is just the same."

"I value alternative strategies for their uncorrelated behavior and concomitant volatility reduction. However, the high fees on these products largely override the benefits they could provide," said bgstuhan, who instead invests in "low-cost REIT ETFs" and "an equal-weighted collateralized commodity futures ETF."

"None of them are worth the considerable risk," said fastball. "I have studied them ... but I ended up not being persuaded of any compelling reason in alternatives' favor."

Peter5 agrees, adding: "I'm one of those investors who have succeeded just fine by keeping it simple."