Yesterday we wrote about whether it makes sense to go heavier into liquid alts with an article from Morningstar as the catalyst. As a follow-on, the Wall Street Journal also looked at liquid alts, noting how well they have done and citing the Morningstar piece.
I want to start with the comments on the article. The commenters seemed to all be unaware of alts, were almost all skeptical or worse ranging from doubtful to believing alts are crypto-like scams. There was one guy who though, I think he's an advisor, who mentioned Pimco Managed Futures repeatedly in an effort to defend the space.
Here's one comment that I think captures the sentiment;
These funds are not appropriate for virtually any retail investors. The strategies and their place in a complete portfolio are too complicated for any but sophisticated professionals to understand. Further, while some of these funds are founded in legitimate theory, many others are not. In all cases, one thing is certain - the strategies will work until they don't. They will all fail catastrophically when the market decides to humiliate them.
So there's a lot to dissect here. First, no one can determine what anyone else should do, that's silly on its face. Plenty of people who are not professional investors can understand at least some funds in the space. In most instances, the ability to understand comes down to someone's willingness to spend the time and having the desire to do so. No one will understand all the funds out there, I certainly don't, but that doesn't mean you shouldn't make the effort. Declaring that all of them will fail catastrophically is pretty hyperbolic.
If you don't want to use alts, don't use alts. The comments might be a good indicator that a lot of people don't. It is perfectly valid to stick with plain vanilla stock and bond exposure. That, combined with an adequate savings rate, suitable asset allocation and the wherewithal to avoid panic will probably get the job done.
If you've been reading my content on this subject for even just a little while, you know why I believe in them and that either resonates or it doesn't. But the nature of markets, investing and all the rest is that the (investing) world evolves and if you're going to manage your own portfolio, I believe some time should be spent trying to learn more in order to at least partially keep up with how things evolve. If you're an advisor of some sort, then you owe it to your clients to keep learning. Alts are one example, crypto is another. Crypto has been around long enough, that any advisor should be able to explain it to a client, even if the answer is why they shouldn't buy any.
The willingness to learn about alts and crypto also serves as a metaphor for staying curious more broadly. Staying curious is a crucial element of successful aging; keeping the desire to learn new things. "Alts are bad news for you and everyone else and no one should even try to learn," as a metaphor, is simply the wrong outlook for life. Specifically alts, who cares, but the person engaged enough in investing to read the Wall Street Journal and go so far as to comment is probably someone who should be learning more, not closing doors.
To the article itself. It specifically mentioned client and personal holding AGFiQ US Market Neutral Anti Beta ETF (BTAL) which according to Yahoo Finance is up 22% YTD versus a decline of just over 20% for the S&P 500 and 17% for the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 equities/fixed income portfolio.
The article quoted Nicholas Rabener saying you should not buy funds that charge more than 1.5%, "it's difficult to justify that cost." Bobby Blue (that's his name) who wrote the Morningstar article said some funds are worth the price tag. As we looked at yesterday, a 20% allocation to BTAL would have spared investors about 700 basis points of decline this year despite charging 2.53%. The management fee is actually less than 50 basis points, the rest goes to the cost of implementing the strategy, it costs money to short stocks. Is the 22% gain for BTAL worth it? Is the 700 basis points spared at this point worth it? That's up to anyone pondering the fund for their portfolio. That's not for me to say or for Rabener to say or anyone else. There's no wrong answer.
There was criticism in the comments about this article being late. Yes it is late in one aspect, but not late in another. We're a long way in to this market event in terms of price even if not time. I've been writing about alts forever but am hardly widely read anymore but the Journal article, written like hey, we found these brand new things no one knows about might be too late to have a great impact for the current event like this same article might have had a couple of years ago.
Where it's not too late maybe is in a longer context. Bonds were essentially a one way trade for 40 years. That appears to be over. What if bonds now will be more of a two-way, cyclical performer? All of the portfolio theories and research and the rest quickly lose relevance if long bonds regularly go up and down 15% in a year or two, they'd be trading more like stocks. The iShares 20 Year Treasury ETF (TLT) is down 22% YTD, total bond market index funds are down 11% YTD. Portfolio theories and research are built on bonds offering ballast against stock market volatility. If that is no longer reliable then it's back to the drawing board to try to find asset classes, products, alts that as I've been describing, do what investors would hope that bonds or bond funds would do but no longer will.
If that scenario holds any water then alts seem like they become more important so don't stick your head in the sand.
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