Lipper's research in this area.
Asset Allocation and Fund Selection
This section helps the advisor understand the proper role of each fund in a portfolio. It starts with the factor exposures that drive the classification, and it uses these to determine a process for evaluating a fund's track record. We discuss how some funds have stood out from the crowd, and we assess the degree to which this might be explained by top-down factors. Each classification is driven by different factors, so we discuss how to evaluate the effectiveness of funds using different strategies.
This book assumes that alternative funds have different roles in the portfolio: portfolio diversifier, equity complement, fixed income complement, directional bet, or hedging of tail risk. Chapter 18 on fund selection discusses these roles in detail. Chapter 15 discusses the process, and it assumes the same roles for alts in a portfolio.
Top Ten Funds
This section reviews the assets, net flows, and investment performance of the top ten funds in each classification. The authors chose to focus on the top ten funds by assets because we believe this is an objective standard that can be used across classifications.
Each Lipper alternative classification is driven by different factors, and the funds play distinct roles in portfolios. This makes it difficult to use a quantitative ranking method that is both fair and comprehensive. It is difficult for a single book to discuss the complete range of alternative strategies using a single measure of risk and return. For example, if we had ranked funds based on returns we would have favored funds with high equity beta, while a ranking based on low max drawdowns would have favored funds with low equity beta.
The downside to our approach is that we seem to be favoring the largest funds in each category. This was not our intent, and we encourage advisors to use their own due diligence and the processes described in this book to uncover hidden gems in each classification that will help their clients reach their goals.
Blockbuster and Spotlight
This section discusses the largest fund in each classification – the blockbuster. The dominance of certain alternative funds may be a sign of investors chasing the hot performance or a popular fund manager. Or it may be a sign that a fund has earned the top spot because of a sustainable investment process. The analysis of blockbusters also helps in understanding investor demand, and may reveal larger trends about issues such as risk tolerance.
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