SKARBECK: Investors should steer clear of multi-alternative funds

July 9, 2016

Ken SkarbeckEvery now and then, you come across investment products that make you frankly just shake your head. Such is the case with multi-alternative mutual funds. Multi-alternative funds employ arcane-sounding investment strategies like global macro, strategic allocation, tactical allocation and hedge fund replication.

Institutional investors were early investors in alternative investment strategies and now the individual investor has been invited into these complex investments via these types of mutual funds.

However, investors would be wise to avoid these funds. The common thread with multi-alternative mutual funds is that their fees are high and the performance has been outright terrible. Morningstar’s five-year average total return for the category is a measly 1.76 percent and annual fees can exceed 2-3 percent.

You might think that, in light of such poor performance, investors would shun these costly mutual funds. You couldn’t be more wrong. In 2015, the multi-alternative fund category saw some of the strongest inflows of any mutual fund category. Investors poured $17.6 billion into these fee-ridden funds, which now house $55 billion of investor assets.

The pitch for these funds centers on the idea that you the individual can now invest just like the big institutions and in the same exotic strategies as hedge fund investors. Investors are counseled that these magical strategies can protect you from market volatility and limit downside risk. Obviously, those features can appeal to investors still harboring memories of 2008-2009 and who are cautious of the uncertainties that plague global markets.

The message that investors apparently are not getting is that the investment returns from these funds have been awful and that the fees they are being charged are exorbitant. Notably, some prominent institutions have finally caught on to this ruse and have begun to exit certain hedge fund strategies just as individual investors are ramping up their exposure to alternatives.

Take the Goldman Sachs Multi-Manager Alternatives Fund. The annual cost for investing in the Class C shares, which are popular with consultants, brokers and advisors, is a whopping 3.48 percent. Included in that cost is a 1.9 percent annual management fee to Goldman Sachs and a 0.75 percent annual (12b-1) fee to the fund salesperson. The Class C shares of this fund have provided its investors with a sickly 0.73 percent annual rate of return for the three years since the fund’s inception.

Even more astounding is that 47 percent of the fund is in CASH. So nearly half of the investors’ investment is sitting there being charged 3.5 percent. Scorecard: Goldman 1.9 percent, salesperson 0.75 percent, investor 0.73 percent. And yet investors have bestowed this mutual fund with $1.3 billion in assets.

In a review of the multi-alternative fund category last March, Morningstar wrote, “In general, we have doubts that many of these funds can rise above their significant fees.” That’s putting it mildly. Mutual funds like these should come with a Surgeon General’s notice: “Warning—Multi-alternative funds are dangerous to your net worth.”

I picked on one Goldman Sachs fund here, but there are others that don’t deserve your money. If you own mutual funds, look for words in the title of the fund like: alternative, multi, macro, real return and absolute return. You can review any mutual fund’s expense ratio and rate of return on Morningstar.com. If the cost appears too high and the historic returns are subpar, sell the fund.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


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