Morningstar Advisor - December/January 2010 - 38

Spotlight Where to Find Low Correlation By Jonathan Rahbar These funds offer investors easy access to complex alternative strategies. Providers of mutual funds and exchangetraded funds have been busy creating new products with alternative strategies for investors to consider as part of a wellrounded portfolio. As such, many of these investments don’t have multiyear performance records yet. Alternative strategies can’t guarantee complete protection in the event of another downturn, but some can offer noncorrelated diversification benefits. By no means is this an exhaustive list of what’s out there, but we looked at some of the biggest funds by assets in multiple alternative categories, in addition to some of the best-performing options. Long-Short As the name suggests, this category is composed of funds that hold both long and short positions in a portfolio. Some of the offerings in the long-short category are market-neutral funds, which divide their exposure equally between long and short positions in order to achieve returns that are not correlated to a particular market. Hussman Strategic Growth HSGFX 21.2% in 2008, which is better than the S&P 500 Index’s 37.5% loss but still tough to stomach on an absolute basis. Rydex/SGI Managed Futures Strategy RYMTX Mutual Funds Investors seeking alternative strategies via mutual funds should look in three categories: long-short, currency, and bear market. Long-only mutual funds that invest in stocks that have exposure to commodities, such as those found in the equity precious metals and natural-resources categories, tend to be too highly correlated to stock and bond markets to qualify as alternatives. Likewise, mutual funds that invest in long-only commodity futures can become highly correlated to traditional markets (during periods of backwardation). To gain a true alternative edge, investors should consider funds that use only long-short commodity strategies. John Hussman runs a flexible strategy here that isn’t very predictable, but after developing a thesis on economic trends, Hussman will move into specific stocks based on price trends and valuations. He can hedge the portfolio by using call and put options on market indexes. In 2008, these short positions worked to his advantage. Although the $5.2 billion fund lost 9% last year, it fared significantly better than the overall stock market. Robeco Long/Short Equity BPLEX The management team behind this fund employs a very distinctive strategy using long and short positions on commodities (except energy) and financial futures contracts. The fund attempts to add alpha over its benchmark, the S&P Diversified Trends Indicator, an index that tracks price trends in 24 different futures contracts. In 2008, the fund succeeded: Its 8.5% return outperformed the index and offered up positive absolute returns in a big down year for the broad markets. Highbridge Statistical Market Neutral HSKAX Although it’s not the biggest fund out there, this offering has posted strong performance in both the short and long term. The management team mainly focuses on small- and midcap companies, seeking undervalued stocks to take long positions in and overvalued stocks with poor fundamentals to sell short. There are a couple of concerns here, though. With an expense ratio of 2.5%, the fund isn’t cheap. What’s more, the fund shed This fund balances its long positions with its shorts, thereby seeking returns that are not correlated to those of the stock market. The portfolio managers use quantitative models to identify long and short candidates by considering short-term price fluctuations. The portfolio is mainly concentrated in mid-caps, but the fund’s sector weightings are often within a few percentage points of the S&P 500 Index’s. The fund posted solid gains in 2008; its 9.8% return was in the top 3% of the long-short category. With the fund’s high turnover—near 800% for the trailing 12 months—investors may not want to hold this option in a taxable account. 38 Morningstar Advisor December/January 2010

Morningstar Advisor - December/January 2010

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2010

Morningstar Advisor - December/January 2010
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
How Big a Role Do Alternative Investments Play in Your Practice?
In for the Long Term: Dana Emery
It's All About the Plan
Investment Briefs
A More Powerful Bankruptcy Prediction Model
This Time It’s Personal
Alternative Investments Go Mainstream
After Meltdown, More Advisors Turn to Alternatives
Where to Find Low Correlation
Commodities Are a Rock in a Hard Place
How Alternatives Protect Portfolios
Shipshape
Slow Scrutiny
Four Picks for the Present
Are Utilities’ Dividends Worth the Worry?
High-Confidence Stock Picks
Long-Short Funds That Pass a Simple Stress Test
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
VA Sales See Some Recovery
New at Morningstar
I Read the News Today, Oh Boy
Morningstar Advisor - December/January 2010 - Morningstar Advisor - December/January 2010
Morningstar Advisor - December/January 2010 - Cover2
Morningstar Advisor - December/January 2010 - Contents
Morningstar Advisor - December/January 2010 - 2
Morningstar Advisor - December/January 2010 - 3
Morningstar Advisor - December/January 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - December/January 2010 - 5
Morningstar Advisor - December/January 2010 - 6
Morningstar Advisor - December/January 2010 - Letter from the Editor
Morningstar Advisor - December/January 2010 - Contributors
Morningstar Advisor - December/January 2010 - 9
Morningstar Advisor - December/January 2010 - How Big a Role Do Alternative Investments Play in Your Practice?
Morningstar Advisor - December/January 2010 - 11
Morningstar Advisor - December/January 2010 - In for the Long Term: Dana Emery
Morningstar Advisor - December/January 2010 - 13
Morningstar Advisor - December/January 2010 - It's All About the Plan
Morningstar Advisor - December/January 2010 - 15
Morningstar Advisor - December/January 2010 - Investment Briefs
Morningstar Advisor - December/January 2010 - 17
Morningstar Advisor - December/January 2010 - 18
Morningstar Advisor - December/January 2010 - 19
Morningstar Advisor - December/January 2010 - A More Powerful Bankruptcy Prediction Model
Morningstar Advisor - December/January 2010 - 21
Morningstar Advisor - December/January 2010 - 22
Morningstar Advisor - December/January 2010 - 23
Morningstar Advisor - December/January 2010 - 24
Morningstar Advisor - December/January 2010 - 25
Morningstar Advisor - December/January 2010 - This Time It’s Personal
Morningstar Advisor - December/January 2010 - 27
Morningstar Advisor - December/January 2010 - 28
Morningstar Advisor - December/January 2010 - 29
Morningstar Advisor - December/January 2010 - 30
Morningstar Advisor - December/January 2010 - 31
Morningstar Advisor - December/January 2010 - Alternative Investments Go Mainstream
Morningstar Advisor - December/January 2010 - 33
Morningstar Advisor - December/January 2010 - 34
Morningstar Advisor - December/January 2010 - 35
Morningstar Advisor - December/January 2010 - After Meltdown, More Advisors Turn to Alternatives
Morningstar Advisor - December/January 2010 - 37
Morningstar Advisor - December/January 2010 - Where to Find Low Correlation
Morningstar Advisor - December/January 2010 - 39
Morningstar Advisor - December/January 2010 - Commodities Are a Rock in a Hard Place
Morningstar Advisor - December/January 2010 - 41
Morningstar Advisor - December/January 2010 - How Alternatives Protect Portfolios
Morningstar Advisor - December/January 2010 - 43
Morningstar Advisor - December/January 2010 - 44
Morningstar Advisor - December/January 2010 - 45
Morningstar Advisor - December/January 2010 - 46
Morningstar Advisor - December/January 2010 - 47
Morningstar Advisor - December/January 2010 - Shipshape
Morningstar Advisor - December/January 2010 - 49
Morningstar Advisor - December/January 2010 - 50
Morningstar Advisor - December/January 2010 - 51
Morningstar Advisor - December/January 2010 - Slow Scrutiny
Morningstar Advisor - December/January 2010 - 53
Morningstar Advisor - December/January 2010 - 54
Morningstar Advisor - December/January 2010 - 55
Morningstar Advisor - December/January 2010 - Four Picks for the Present
Morningstar Advisor - December/January 2010 - 57
Morningstar Advisor - December/January 2010 - 58
Morningstar Advisor - December/January 2010 - Are Utilities’ Dividends Worth the Worry?
Morningstar Advisor - December/January 2010 - 60
Morningstar Advisor - December/January 2010 - 61
Morningstar Advisor - December/January 2010 - High-Confidence Stock Picks
Morningstar Advisor - December/January 2010 - 63
Morningstar Advisor - December/January 2010 - Long-Short Funds That Pass a Simple Stress Test
Morningstar Advisor - December/January 2010 - 65
Morningstar Advisor - December/January 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - December/January 2010 - 67
Morningstar Advisor - December/January 2010 - 68
Morningstar Advisor - December/January 2010 - 69
Morningstar Advisor - December/January 2010 - 50 Most Popular Equity ETFs
Morningstar Advisor - December/January 2010 - 71
Morningstar Advisor - December/January 2010 - 72
Morningstar Advisor - December/January 2010 - Undervalued Stocks
Morningstar Advisor - December/January 2010 - 74
Morningstar Advisor - December/January 2010 - 75
Morningstar Advisor - December/January 2010 - VA Sales See Some Recovery
Morningstar Advisor - December/January 2010 - 77
Morningstar Advisor - December/January 2010 - 78
Morningstar Advisor - December/January 2010 - New at Morningstar
Morningstar Advisor - December/January 2010 - I Read the News Today, Oh Boy
Morningstar Advisor - December/January 2010 - Cover3
Morningstar Advisor - December/January 2010 - Cover4
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