Alternative Investments
These three offbeat investments might be able to make money for you when stocks and bonds don't.
By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance
June 29, 2009
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Three advisers walked up to me after I spoke at a recent financial planners' conference. We schmoozed about the usual stuff -- the stock market, interest rates, inflation and so forth -- then we talked about the state of their businesses. The mood turned sour. "We're all ticked off," said one of the advisers, a man I have known and admired for a decade. Actually, those weren't his precise words; I cleaned them up a bit for family consumption. But you get the picture.
Why are they so annoyed? These are hard times for money managers. Most at this conference -- run by the National Association of Personal Financial Advisors, an organization of fee-only planners -- derive the bulk of their income not by charging clients by the hour or by the plan, but by claiming a portion of assets under management, typically on the order of 1%. Thanks to the bear market, "everyone in this room is taking a big pay cut," said the adviser.
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The bear market has also left many advisers questioning many of the investing verities that have been drummed into them over the years -- in particular, the long-term performance advantage of stocks and the importance of diversification. The pros are asking whether these things still make sense and whether it's time to look at alternative approaches to money management.
Not coincidentally, "alternative" was one of the buzzwords at the NAPFA meeting. Another was "non-correlated." To be more precise, the conference's exhibit hall was filled with firms promoting non-correlated, alternative investments. In plain English, they were hawking investments that don't move in sync with things like the U.S. stock market and Treasury bonds. Here are some of the alternatives that were featured, along with my impressions:
Managed commodity-futures funds. These products make bets on anything you can purchase a futures contract on -- from pork bellies and wheat to gold and petroleum to interest rates and stock indexes. Because it takes a small amount of cash to control a large amount of a commodity, futures can be very volatile. But representatives of several funds demonstrated that over both short and long periods, managed-futures accounts make money when stocks and bonds don't and can dampen a portfolio's volatility.
Until recently, you needed to invest with a commodities trading adviser (CTA) to get into managed-futures funds. But these products suffer from three big problems. The first is information, or lack thereof. Who can name any of these accounts? The second is high costs. Like hedge funds, commodity-trading accounts typically charge 2% a year and grab 20% of the profits. The third is lack of accessibility. To gain access to a CTA, you generally must be an accredited investor, meaning that you must have a high net worth or earn a big income.
But now, financial firms want to offer commodity-futures strategies to the little guy. Several hedge-fund sponsors now offer commodity-futures funds with modest initial-investment requirements. For example, you can invest in Grant Park Global Alternatives Markets 3, a fund run by experienced teams from different commodity advisers, with as little as $5,000 in a regular account and $1,000 for a retirement account. On the class of shares with those minimums, the break-even level (similar to a mutual fund's expense ratio) is 5.72%. Clearly, that's on the high side. You'll have to decide for yourself whether the price is right.
A better choice may be Rydex Managed Futures Strategy (symbol RYMFX), a regular mutual fund that seeks to match the daily performance of the Standard & Poor's Diversified Trends Indicator, which invests 50% in commodity futures and 50% in financial futures. The fund, which requires $25,000 to start, charges a relatively modest 1.88% a year and a 1% redemption fee if you sell within 30 days of purchase.
Reader Comments (2)
Posted by: IA Farm investor at 07/09/2009 10:19:22 PM
Your numbers from Agrinuity don't look right. $5k/acre cost is low for Iowa land that rents for $250/acre; taxes run about $25/acre/year, and you definitely will owe IA state tax on the income, at about $16/acre. And that's before you've paid the management fees. And before you've paid maintenance fees for upkeep of drainage tile, and the like. And farmers that pay on the high side of the rent market sometimes don't pay at all; on top of that, a bad farmer can ruin the land over the years. There's more, but that'll do. I've been in that business for 20 years; not a bad one to be in if you bought years ago, but not so good to get into now.
Posted by: Chris Kreuder at 09/28/2009 03:44:59 PM
I am involved with Agrinuity and I would like to address the comment below with an example. We just finished project in which a client paid $4650 per crop acre for a property that paid $250 per crop acre yearly rent from a respectable family farming operation. He does have $15.50 in real estate taxes per acre to pay. I agree with his comments that you need to be careful when choosing operators.