With so many “alternatives” these days (alternative energy, alternative music, alternative lifestyles) it’s no wonder a recent survey found there was general confusion about the definition of “alternative investments”. Hedgeworld recently reported that David Reilly, director of portfolio strategies at Rydex Investments told a press conference “If you ask 10 people what alternatives are, you can get 10 different answers.”
Rydex’s response was to launch a fund of funds called the “Alternative Strategies Allocation Fund” that keeps things simple for investors by wrapping up various alternative investments into one vehicle. But don’t call it a fund of hedge funds because its total hedge fund content weights in at exactly zero percent. It’s actually a fund of: managed futures, commodities, currencies, real estate and tiny bit of, wait for it, hedge fund replication.
As the firm points out in a press release announcing the launch of the strategy, retail investors have had a tough time participating in the alpha-centric investment revolution so far:
“For years, institutional investors have used alternatives to help mitigate portfolio declines and enhance returns. Retail investor portfolios, on the other hand, tend to consist primarily of traditional assets such as domestic and international stocks, bonds and cash.”
Naturally, we fully support efforts to allow average investors to hold uncorrelated, alpha-producing assets. But the complexity of this particular product provides an interesting insight into why investors are apparently so confused.
As of April 1, over 58% of the funds was invested in commodities (the Rydex Managed Futures Strategy and its Commodities Strategy), 20% was in a Powershares currency fund, 12% was in the Rydex Real Estate Strategy. Only 4% of the fund is allocated to “absolute returns” (a.k.a. “hedge funds”).
It’s no fluke that the fund is dominated by the managed futures fund – that strategy has been hitting the lights out since October:
Meanwhile, the Absolute Return Strategies fund has been producing a return that can be said to have just as high an absolute value:
While it has not really tracked the hedge fund universe, this absolute return strategy is actually billed as a hedge fund replication fund in the firm’s literature. Yes, the strategy some say is so prosaic that major institutions can’t get their heads around it, has actually been offered since 2005 for an initial investment of only $2,500.
In fact, the fund’s prospectus will probably sound very familiar to students of hedge fund replication:
“The Absolute Return Strategies Fund seeks to provide capital appreciation consistent with the return and risk characteristics of the hedge fund universe. The secondary objective is to achieve these returns with low correlation to and less volatility than equity indices…The Absolute Return Strategies Fund employs a proprietary quantitative style analysis to drive an investment strategy designed to provide investment returns similar to the returns produced by well-established investment strategies widely employed by hedge funds.” [our emphasis]
As you might expect, such a quantitative strategy involves a large number of positions both long and short. In fact, the Absolute Return Fund had around 700 positions as of December 31, 2007 (see SEC filing). And the breadth of “well established hedge fund strategies” is equally as impressive:
- Fixed Income
- Covered Calls
- Market Neutral Value
- Market Neutral Growth
- Market Neutral Momentum
- Market Neutral Capitalization
- Merger Arbitrage
- Duration-Neutral Term Spreads
- Duration Neutral Default Spreads
Like 130/30 indices (see related posting), it’s often difficult to differentiate between attempts at hedge fund “replication” and attempts to actually run a quant hedge fund. So at the end of the day, it may come down to marketing more than anything – leaving investors guessing about whether this new offering is a fund of hedge funds, a managed futures fund, a hedge fund clone, or a quant hedge fund.
There is a lot of confusion about the definition of “alternative investments” and we don’t have an easy solution. But the more immediate question for Rydex might be “If you ask 10 different investors to define the Rydex Alternative Strategies Allocation Fund, will you also get 10 different answers?