(PUB) Investing 2016

Morningstar FundInvestor

March 201

provide diversification from standard asset classes.

Some funds in the category—particularly global-

macro managers—do tend to take on more market

exposure and higher volatility, depending on their

current views of the economy and markets. Results

have been mixed so far, however.

A bright spot for the category has been its decent

downside protection, reflected in its moderate beta

(a measure of equity sensitivity) of

and three-year

downside capture ratio of

42%

. In January

2016

when global markets were tanking, this category held

up well: While the

MSCI

World Index lost

00%

the multialternative category lost

55%

. The category

does carry market exposure and is not immune

to losses, but many funds have shown that they can

fulfill their role as diversifiers.

Returns in up markets, however, have been dismal.

The multialternative category’s average annualized

return during the past three years through January

2016

was a marginally positive

69%

. It’s not

surprising that the category would trail the S

500

(

) by a significant margin, but on a beta-

adjusted basis, the lag is greater than expected. More-

over, the fund trails both the conservative-allocation

category (slightly) and a blended

40 MSCI

World/

Barclays Aggregate benchmark (more pronouncedly),

though its volatility (based on standard deviation) has

been lower than both.

Multialternative Recommendations

When assigning Morningstar Analyst Ratings to

funds in the multialternative category, Morningstar

analysts emphasize established management

track records running the strategy or similar versions;

strategies that provide true diversification in the sense

of lower correlations and betas to traditional asset

classes; parent firms with a legacy of keeping share-

holders’ interests in mind; and lower fees. And

while alternative funds are most often sold through

advisors, many are available through retail fund

platforms. Here are a few of our favorite multialterna-

tive funds that are accessible to individual investors.

Multistrategy:

Within the multistrategy subgroup,

we recommend two Bronze-rated multimanager funds,

Litman Gregory Masters Alternative Strategies

MASFX

and

John Hancock Alternative Asset Alloca-

tion

JAAAX

. Both are headed up by teams with

extensive experience vetting managers and putting

together portfolios in the mutual fund arena. Litman

Gregory uses a fund-of-hedge-funds structure, taking

a fairly concentrated approach with only five sub-

advisors, while John Hancock uses a more diversified

fund-of-funds structure.

Global Macro:

Bronze-rated

John Hancock Global

Absolute Return Strategies

JHAAX

, subadvised by

Scotland-based Standard Life Investments, has

become one of the largest alternative mutual funds,

with

billion in assets under management in

the United States and more than

$75

billion across its

worldwide vehicles. The flagship strategy has a

record going back to

2008

, and lead manager Guy

Stern has been on the strategy since then, though

the team has endured significant turnover. Stern is

backed by a deep,

-person analyst team that

develops trade ideas designed to be profitable over

a three-year period.

Hedge Fund Replication:

Bronze-rated

Natixis ASG

Global Alternatives

GAFAX

features at its head one

of the leading academic researchers on hedge fund

replication, Andrew Lo, also a co-founder of AlphaSim-

plex Group. The quantitative team running the fund

seeks to replicate the asset-class exposures (or betas)

of the hedge fund industry by regressing the returns

from several major hedge fund databases. The team

constrains positions to achieve an

volatility target

and employs a proprietary stop-loss system to manage

downside risk.

Contact Josh Charlson at

josh.charlson@morningstar.com

Multialternative Category 3-Year Performance Statistics