Forex Signals

During the stock market’s recent swoon, J.J. Burns has been getting the same message from his clients. “Keep me out of the stock market,” they tell the New York–based adviser. But they also have another request: “Make me money in the market if it soars.”

So Burns, who manages more than $300 million for clients, says he’s become a quick study on so-called alternative-investment mutual funds, products that seem to use every strategy invented except the one most of his clients are used to: buying and holding stocks. He’s attended seminars, read fund literature and even called pals who went to the Massachusetts Institute of Technology to help him figure them out. And slowly, he’s warming up to this newfangled form of investing. “They can be a way to stay in the stock market, safely,” he says.

After a long summer of watching some scary ebbs and flows in the market, a growing number of Main Street investors are dabbling in alternative investments that often take complex routes to achieve a simple goal: smooth out the big dips in their portfolio and end up with steady, long-term gains. Alternatives, which can involve anything from investing in commodities to betting on mergers and acquisitions, are still just a sliver of the $12 trillion mutual fund universe. But one of the most common forms, known as absolute-return funds, has almost tripled in size in two years, to $16.9 billion, taking in $6.7 billion in just the first six months of this year. Advisers say they can’t get enough of them. “We are not trying to kick the ball out of the park but rather get more predictable returns,” says Jane Williams, who’s finding herself recommending more alternative investments to her clients as chief executive of Sand Hill Global Advisors, a Palo Alto, Calif., wealth-management firm overseeing $1 billion.

To be sure, the woes of the Dow are spurring a lot of this action. But the money-management industry has been drumming up a lot of the interest too. Hedge funds, commodity pools and the like have been open to the well-heeled for decades. But by lowering the minimum investment on these products from the million-dollar range to as low as $1,000, fund firms are now aiming squarely at the broader market. They also have been adding new products for ordinary investors, launching more than 90 mutual funds that can be classified as alternative in the past three years alone, according to Lipper, a fund-research firm.

Some planners say that hot as it is, this is a trend investors can ignore. Funds that put their money in alternative investments can be expensive, with fees that are about twice as high as those of a traditional mutual fund. And while some of these products are marketed as “all-weather” investments, advisers question whether they can really make money in every investment climate. Larry Swedroe, director of research at the Buckingham Family of Financial Services, tells clients that adding high-quality bonds to a portfolio is a far simpler—and cheaper—way to hedge against a declining stock market.

Still, a growing number of planners are giving the new products a shot, with some putting as much as 30 percent of their clients’ portfolios in these investments. We assess the alternatives.

Illustration by Mark Ulriksen.