When someone says a mutual fund is an "alternative" fund, what do they mean?

Since the heart of the financial crisis six years ago, Matthias Rieker of the Wall Street Journal reports, the alt funds count has jumped to 550, up from 150. Yet what makes a fund (or strategy, or asset class) an "alternative" one is the subject of much debate, the WSJ notes.

Some see long-short strategies and unconstrained bond funds as falling within the broader, traditional, equity and fixed income categories. That would push the "alternatives" label to more exotic strategies and asset classes, like managed futures funds or "collateralized reinsurance contracts" (i.e. catastrophe bonds).

For fundsters, and the advisors who offer their wares to investors, some of the appeal of alternatives may lie precisely in that miscellaneous, vague categorization, that mystery. A strategy that is harder to define and classify is also harder to replicate, or index, so the rise of alternatives is in some ways the counter-attack of the active managers against the rise of indexing.

The WSJ says that, according to Dennis Bowden of Strategic Insight, about two-thirds of assets in alts funds are in alt bond funds or long-short funds. And as an alts style spreads further, those miscellaneous, indefinable, non-replicable attributes may fade, leaving alts fundsters to push further out on the product frontier. And the investor and advisor confusion sometimes associated with alts' mystery may make alts more of a concern to regulators, too. (The WSJ quotes Finra regulatory operations chief Susan Axelrod on the subject.) 

Edited by: Neil Anderson, Managing Editor


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