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Alternative Funds Finding New Ways to Hedge

Jason Kephart, CFA

Jason Kephart: Multialternative funds really got on investors' radars last year. The category took in $9 billion of inflows, almost triple its previous high, and it's taken another $4 billion so far this year. These funds are designed to lower the overall volatility of a portfolio without lowering overall returns.

One of the trends we've seen really driving the growth of the category is the emergence of mutual funds of hedge funds. Firms like Goldman Sachs, Franklin Templeton, and Neuberger Berman have all launched funds that offer investors access to true hedge fund managers and strategies in the last couple of years. Hedge fund managers had been reluctant to offer their strategies in 40 Act funds before, but given how the fund of hedge fund space is drying up and the growth of liquid alternatives, we are seeing more of them open to it.

One of the problems with these funds is that they haven't really been around in the type of volatile environment you'd want to see them protect against. So they are a little bit of an unknown in how they will react in those kind of environments.

One fund we do like in the category is Arden Alternative Strategies; we have it rated Bronze. One of the things we like about Arden's management is they have a long track record in the fund of hedge fund space. So we are confident that they will be able to translate some of that over to the mutual fund space. Given that a lot of these funds don't have a long track record yet, investors are best-served taking a cautious approach to using them.