Morningstar Magazine - February/March 2018 - 10

Dispatches

EXHIBIT 2

expenses of mainstream categories such as large
blend and allocation ( EX H I BI T 2 ).

Alternative Category Expenses Tower Over Traditional Category Costs

The subtle side of the expense story, however, is
that many of the strategies most worth owning are
in fact expensive to run and capacity-limited.
Competing on price to draw assets may not make
sense, because the managers will need resources
to produce strong results even after the fund
has closed to new investors. What's more, liquid
alts are meant to be a small part of a portfolio.
The impact of a 10% allocation to an alts fund with
a high expense ratio on an otherwise low-cost
portfolio's overall expenses may be justified given
the peace of mind it can provide an investor.

Morningstar Category

Avg Prospectus Net
Expense Ratio (%)

Avg Mgmt
Fees (%)

Avg Other Fees,
Net Waivers (%)

Long-Short Equity

1.64

1.32

0.32

Managed Futures

1.63

1.32

0.31

Multialternative

1.58

1.11

0.47

Market Neutral

1.33

1.04

0.29

Options-Based

1.23

0.95

0.27

Allocation

0.97

0.55

0.42

Large Blend

0.68

0.54

0.14

Source: Morningstar Direct. Data as of 09/30/2017. Institutional share classes only.

We're Here to Help

Despite these headwinds, new alternative
fund issuance in the United States in 2017 was
greater than it was 2016, and the number
of fund shutterings has fallen each year since 2014.
After a shake-out from 2011 to 2015, investors are
left with more viable choices than ever.

EXHIBIT 3

No Alternative Funds Have Earned a Gold Morningstar Analyst Rating
AUM ($bil)

% of All Alts AUM

Number of Funds

Œ

0

0

0

„

37

17

8

Evaluating alts remains difficult, but that's what
the Morningstar Analyst Rating for Funds is for.
As is the case for all the funds we evaluate, we've
set the bar high. In fact, not a single U.S.domiciled alts fund has a rating of Gold ( EX HIBIT 3 ).

´

44

20

24

‰

41

18

30

Á

0

0

2

∏

102

45

772

Take advantage of the homework our analysts have
done to assign ratings to the most widely held and
successful strategies ( E X H I BIT 4 ). The rating is
the conclusion; our thought process for each rating
is accessible via Morningstar software products.

Total

224

100

836

Source: Morningstar Direct. Data as of 12/31/2017.

EXHIBIT 4

Liquid alternatives funds' high expense ratios,
low returns since 2009, and incongruity with
modern advisory practices make it hard to imagine
that they will thrive as a product class in
the near future. But advisors' focus is the achievement of their clients' financial goals. For
clients unwilling to accept the risk-free rate
on a significant sleeve of their portfolios, it's time
to give alternatives another look. K
Sylvester Flood is chief content strategist with Morningstar.
He is a member of the editorial board of Morningstar
magazine.
Tayfun Icten, a senior analyst, alternative strategies, with
Morningstar Research Services, contributed to this article.

10

Morningstar February/March 2018

Our Analyst Assessments of Popular Alternative Funds
Name

Morningstar
Analyst Rating

Morningstar
Category

Morningstar
Rating

AQR Managed Futures Strategy N

´

Managed Futures

QQQ

1.49

Boston Partners Long/Short Rsrch Instl

„

Long-Short Equity

QQQ

1.41

Dreyfus Global Real Return I

„

Multialternative

QQQQ

0.88

JPMorgan Hedged Equity R6

„

Options-Based

QQQQ

0.35

JHancock Global Absolute Ret Strats NAV

´

Multialternative

QQQ

1.22

Diamond Hill Long-Short A

´

Long-Short Equity

QQQ

1.40

Natixis ASG Managed Futures Strategy Y

´

Managed Futures

QQQQ

1.49

Source: Morningstar Direct. Data as of 12/31/2017.

Expense
Ratio



Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
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Morningstar Magazine - February/March 2018 - Contents
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