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Did Alternative Funds Stand Tall or Fall Down?

Late August provided a stress-test.

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When the markets swooned in late August, many eyes pivoted to liquid alternatives. Would these newfangled investments, promoted in part for their ability to provide a cushion to portfolios during times of turbulence for the markets, fulfill their promise? A sharp six-day market correction (or even a multimonth downturn, if you count the S&P 500's decline from its high point in May 2015), is probably not sufficient to take the full measure of these funds, but it's enough of a deviation from the largely placid bull market of the last half-decade to at least offer some relevant insights. Call it a stress-test, if you will, of alternative mutual funds' resiliency.

The Wall Street Journal weighed in quickly with a fairly negative assessment: Alternative funds offer "limited protection," read the headline (I was quoted as a source in that article, in full disclosure). But the disappointment voiced in the article seems to be based on faulty, or at least overly ambitious, expectations: that alternatives should provide complete protection in a downturn or at a minimum outperform intermediate-term bonds.

Josh Charlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.