Alts: Like a Box of Chocolates

So news is circulating today about one the largest liquid alternative investments and its absolutely rotten year.   According to the fund’s website, Good Harbor financial’s Tactical Core US A (GHUAX) is a long-only (no short selling any stocks) US large cap strategy benchmarked to the S&P 500.  They even go so far to say  that the fund is “Designed to align with US stocks during sustained bull markets” and “Designed to move defensively to US Treasuries during sustained bear markets.”  Well wouldn’t that be nice?

GHUAX is down -20.03% in 2014 through 12/29. Benchmark performance? 15.42% through 12/29/14.  So the fund underperformed its benchmark by over 35% so far this year.  According to the most recent figures from Morningstar, the fund has over $600 million in assets.

ghuax

Like any other tactical strategy, the fund is rotating in and out of the market based on whatever measure it feels it going to reveal the future.  We used to call this market timing, but tactical sells a lot better. I honestly cannot tell you how the fund managed to generate a -20.03% return in this market by only owning US stocks and bond futures.  Clearly, some bad bets were made throughout the year. Probably many bad bets.

Quite frankly, this is the trouble with any type of tactical, long-short, unconstrained or go-anywhere strategy.  You never know what you’re gonna get. It is great marketing to say “we give our best managers a long leash to invest in whatever asset classes they feel are attractive at the time,” but you are putting a tremendous amount of confidence in that manager’s (or their computer’s) forecasting abilities. You’re gambling. Sometimes those bets will pay off in a big way.  Other times they will blow up in your face.  Is the portfolio manager going to buy US stocks? Bonds? Gold? International? Is he going to short the 10-year at the wrong time or try to catch a bounce in oil prices?  With such a huge sandbox to play in, can any manager accurately make valuation, trading and timing calls on a dozen asset classes?

Given that the practically all research on forecasters shows them to be less accurate than a coin toss, throw in average alternative fund expenses of 1.80%, turnover of several hundred percent (GHUAX has 773% turnover) and you can be all but certain that if you make these bets long enough, you’ll come out on the losing end.

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