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Why Manager Selection Is Critical For Alternative Investors

Apr. 15, 2018 9:59 AM ET
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Posted by Walter Davis, Alternatives Investment Strategist on Apr 10, 2018, in Alternatives

Why manager selection is critical for alternative investors

The recent (and long-awaited) return of market volatility has put alternatives back on the radar screen. But not only must investors familiarize themselves with the different types of alternatives that are available to them, they must also assess the skill level of the managers running these funds. Manager selection is a question that all investors face, of course, but it’s especially critical for investors in alternatives because these managers have greater freedom in their investment strategies. This freedom leads to a wide dispersion between the top-performing and below-average alt managers, and that dispersion is typically greater than what is found in traditional equity investments.

Comparing top and bottom managers

The below table examines the dispersion of returns for alternatives and traditional equities. For this example, alternatives are represented by the Morningstar Long-Short Equity Category. Traditional equity investments are represented by the Morningstar World Large Stock Category. (We chose the latter category to represent a more “traditional” investment as it represents the type of long-only, large-cap strategies that most equity investors have exposure to.) The table examines the historical gap in performance between the top quartile and third quartile for each category. After comparing these returns over three different periods, we can see the much wider range of returns in our alternatives example. Past performance is not a guarantee of future results. Alternative investments include private equity, managed futures, commodities and derivatives, while traditional investments generally refer to equities, bonds and cash. Alternative investments can be less liquid and more volatile than traditional investments, such as stocks and bonds, and often lack longer-term track records. Investors should consider using financial advisors when making portfolio decisions.

Source: Zephyr. Data as of Dec. 31, 2017. Top performers are represented by the first quartile in the

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