Alternative mutual funds are currently the fastest growing asset class in the industry. They allow retail investors access to hedge fund strategies that are otherwise limited to only high net worth investors.
Different hedge fund strategies satisfy different investment goals such as short-term, long-term, and diversification. Popular hedge fund strategies such as long/short, market neutral, global macro, and distressed debt all can be mimicked by alternative mutual funds to achieve investment goals.
The PIMCO RAE Low Volatility Plus Emerging Fund Class A (PLVVX) is an alternative mutual fund that mimics the long/short strategy to construct a portfolio with low volatility and high-income securities. The PLVVX portfolio primarily consists of securities issued in emerging market countries.
YTD performance comparison
The above graph compares the quarterly and year-to-date (or YTD) returns of PLVVX with other similar strategies. It uses alternative funds such as the John Hancock Funds Absolute Return Currency Fund Class A (JCUAX) and the GMO Risk Premium Fund Class VI (GMOKX) as of December 11, 2015.
PLVVX and JCUAX have both fallen. GMOKX, on the other hand, has managed YTD returns of 4.9%.
Falling emerging markets
Low corporate earnings, flat yield curve, and weak emerging economies have resulted in PLVVX performing poorly in the market. One-half of PLVVX’s portfolio is allocated to bonds issued by Fannie Mae (FNM), Freddie Mac (FHL), and the U.S. Treasury. The portfolio also consists of corporate bonds and notes of various companies such as Bank of America (BAC), Ally Financial (ALLY), subsidiaries of General Motors (GM), and Citigroup (C).
In the next article in this series, we’ll compare the performance of PLVVX with its benchmark, the MSCI Emerging Markets Index.