If you want to invest in an alternative strategies fund, you'd best read the offering memorandum extra carefully, and get to know the manager as well as the company because the 177 funds in this catchall category can vary dramatically in objectives and strategies as well as performance.
The Canadian Investment Funds Standards Committee (CIFSC) defines a fund as alternative strategies "if short selling exceeds 2 per cent in any one security or if total short positions exceed 10 per cent of the total fund value; and/or 2) the fund's investment mandate specifically includes use of alternative strategies".
That can cover a lot of ground, as is readily seen from performance variations amongst individual funds in the category. For the year through January 2010, for example, alternative strategies fund yields ranged all the way from 178.2 per cent (for Salida Multi Strategy Hedge Fund, which also topped the five-year performance rankings with a 24.9 per cent average annual compound return) down to -78.4 per cent for the Mac Alternative Strategies Fund.
Even the best five-year performers in the category - Salida Multi Strategy as well as Dynamic Power Hedge Fund and Trident Global Opportunities Fund (Trident chief investment officer Nandu Narayanan also manages the now-closed CI Global Opportunities Fund) - delivered 20 per cent-plus average annual five-year returns but diverged wildly over other times frames.
One-year returns through January for Salida and Dynamic (178.2 per cent and 153.8 per cent respectively) are vastly better than Narayanan's returns of -6.0 per cent and -6.4 per cent for the CI and Trident Global Opportunities Funds; but for the three years through January 2010, Narayanan delivered 42.6 per cent and 34.8 per cent respectively while Salida delivered 7.8 per cent and Dynamic did only 1.1 per cent. Yet they all delivered 20 per cent-plus over five years.
Meanwhile, the category's fifth-best performer over the five-year time frame through January 2010s - PH&N Absolute Return Fund, with an average annual compound return of 19.7 per cent -- managed to saw off the other four funds' wild gyrations, yielding 53.1 per cent for the year through January 2010 and 18.8 per cent over three years through January. Understandably, the three-year deviation figures for these funds varied dramatically too, from 0.10 for PH&N to 0.51 For Dynamic.
These performance figures may seem like quantum physics applied to mutual fund returns - no predicting where yields might be at any given moment for members of this category. It's partly because of vastly different investment approaches, and partly because of the greater leeway afforded managers of these products as opposed to mainstream mutual funds.
"There are a few things you have to bear in mind about alternative strategies funds," says Derek Green, president and national sales manager for C.I. Investments Inc.. "Because they're sold by offering memorandum only to 'sophisticated' investors, the portfolio managers have much greater latitude in terms of how they can invest.
"Odds are that if they see a way to make money, they can probably do it," Green adds. "There's more latitude and also a lot less transparency than with other mutual funds. Because of this, you have to have a tremendous amount of trust in the portfolio manager as well as the fund company if you are going to investment in an alternative strategies fund.
"Now, some alternative strategies fund managers have taken liberties with the hedge fund designation," Green continues. "Some weren't really true hedge funds providing an alternative to other market investments. Many were really leveraged long funds that grew in rising markets, but didn't do so well when the markets fell.
"Ours are true hedge funds, and that's why we didn't do so well last year when the markets were rising, but we did quite well in 2007 and 2008 when the markets fell," says Green. "The CI Global Opportunities Fund and the Trident Global Opportunities Fund are non-correlated assets for use in very diversified portfolios. They're like an insurance policy on the markets, and you can see that in the performance figures. You can't say that about most other investments."
