3_4 Alt Investments 2008 - The 'Alternatives' Route Was...

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1/8/09 1:49 PM The 'Alternatives' Route Was Tough Going in 2008 - WSJ.com Page 1 of 3 http://online.wsj.com/article/SB123110886276352099.html#printMode By SHEFALI ANAND As the market crashed last year, investors learned a hard lesson: Efforts to cushion losses don't always work. Over the past few years, investors and financial advisers have been pouring more and more money into commodities, real estate and other vehicles that were once niches for the well-to-do. The idea? These "alternative" investments were supposed to diversify their portfolios and cushion the shock when stocks and bonds took a dive. That's the theory, anyway. But last year, commodities, real estate and other alternatives fell along with the stock and bond markets. For instance, mutual funds that invest in real estate and commodities were down on average 40% to 50% in 2008, according to data from Morningstar Inc. Judith Shine, of Shine Investment Advisory Services Inc. in Lone Tree, Colo., allocated about 20% of her typical client's portfolio to alternatives. But now, she laments, "we wish we had gone into three-year Treasurys as an alternative investment." U.S. debt was one of the few assets that rose in value in 2008. Still, Ms. Shine is keeping a 15% allocation in alternative investments, hoping they will turn around in the future. "We could be sitting here a year from now and saying, 'Boy, that was all nasty, but it all worked out,' " she says. For an idea of just how popular alternatives have become, consider this: Nearly a quarter of the 600 mutual funds, exchange-traded funds and exchange-traded notes launched last year were real estate, commodity and hedge-fund-like funds, according to Morningstar. Most alternatives were in the form of ETFs, which are basically mutual funds that trade like a stock. All that activity was the culmination of a very busy stretch: Over the past five years, financial companies have launched hundreds of alternative products -- some of them much more arcane than real estate and commodities. Last year, in fact, Morningstar added an "alternative" asset class to its fund-classification system. The grouping includes funds that invest in currencies and those that use "long short" or "bear market" strategies -- approaches that bet against specific stocks or the market itself, either by shorting or by buying instruments such as derivatives. Those types of complex alternatives are getting more popular as real estate and commodities tank. In part, that's because financial advisers are scrambling to find ways to make money in this market, and obscure instruments seem to offer a solution. For instance, many advisers are piling into "managed futures" funds, in which the manager buys futures and other derivatives based on proprietary computer models that indicate when to enter or exit the market. Many of these funds -- which are mainly private funds and hedge funds -- delivered positive returns in 2008. "Folks are definitely looking for strategies that can do well in sideways to difficult markets," says John Moninger,
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This note was uploaded on 10/18/2009 for the course UGBA 133 taught by Professor Distad during the Spring '08 term at University of California, Berkeley.

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3_4 Alt Investments 2008 - The 'Alternatives' Route Was...

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