ALTERNATIVE INVESTMENTS

“Alternative investments” is a misnomer as they are not one stand-alone

asset class. Alternatives span a diverse range of both asset classes

(e.g. private equity, commodities) and strategies (e.g. hedge funds)

that go beyond the traditional stocks and bonds.

 

They include, but are not limited to, such investments as

private equity, direct hedge funds, and real assets.

 

Hedge funds are the focus of Miles Capital Funds.

Liquid alternative investments or liquid alts are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies.

 

All investments involve risk, including loss of principal.  The Fund cannot guarantee that it will achieve its investment objective.  Investors in alternative investments should bear in mind that these products can be highly speculative and may not be suitable for all clients.  The underlying funds may hold less liquid securities, so there is a risk that an underlying fund may be unable to sell the security at an advantageous time or price; therefore your redemption value may be less favorable. 

ALLOCATION TRENDS

Over the last 25 years, allocations to all alternatives have risen significantly due to the many potential benefits (see below). The trend has been led by institutional investors such as endowments, foundations, and pensions. 

SOURCE: NACUBO-Commonfund Study of Endowments

All data based on composites and peer groups from U.S. statutory filings. There can be no guarantee that any investment strategy discussed here will achieve its investment objectives. As will all strategies, there is a risk of loss of all or a portion of the amount invested. 

Today, individual investors' allocations to alternative–primarily hedge fund options–have begun to increase significantly as well. 

SOURCE: “Mainstreaming of Alternative Investments”, McKinsey & Co.

All data based on composites and peer groups from U.S. statutory filings. There can be no guarantee that any investment strategy discussed here will achieve its investment objectives. As will all strategies, there is a risk of loss of all or a portion of the amount invested. 

This growth has been enabled by the advent of hedge fund investment opportunities and increased transparency.

However, the growth is also due in large part to the many potential benefits these strategies can offer.

 

POTENTIAL BENEFITS OF HEDGE FUNDS

Hedge Fund investments are typically made for one of two reasons: to try to generate absolute returns or to attempt to provide risk mitigation. At Miles Capital, we focus on constructing portfolios to help manage risk within the broader client portfolio.

The potential benefits of hedge funds include: reduced risk; diversification; and enhanced, risk-adjusted returns.

POTENTIAL FOR REDUCED RISK

Many hedge fund strategies offer the potential for reduced risk as they can both own long positions and sell short positions, and adjust net exposure based on market conditions. Allocations to hedge funds may help reduce downside or portfolio volatility during difficult market cycles.

 

When equities perform poorly, hedge funds have historically experienced less depreciation, as demonstrated below. Alternatively, when bonds have lost value, hedge funds have typically provided positive returns.

Source: Miles Capital

*Hedge Funds as referenced above is represented by the HFRI Fund Weighted Composite.

The up-market capture ratio is the statistical measure of overall performance in up-markets, a percentage of positive return relative to an index during periods when that index has risen. The down-market capture ratio is the statistical measure of overall performance in down-markets, a percentage of negative return relative to an index during periods when that index has declined. The capture ratio is the ratio of up-capture relative to down-capture.

Past performance is not indicative of future results. There is no guarantee that any investment will achieve its objectives. As with all investments, there is risk of loss of all or a portion of the amount invested. Index performance is shown for illustrative purposes only. An investor cannot invest directly in an index Moreover, indices do not reflect commissions or fees that may be charged to an investment product, which may substantially affect the performance data presented. Time period is July 1996 - June 2016. US Stocks: S&P 500, Bonds: Barclays US Aggregated, Hedge Funds: HFRI Fund Weighted Composite.

Short sales have the possibility of unlimited losses.  The fund is subject to allocation risk, such that the Fund may at times favor an asset category or strategy that performs poorly relative to other asset categories and strategies.

Circumstances could create a situation whereby utilizing a hedge fund strategy could have the adverse effect of increasing volatility

DIVERSIFICATION

Because alternatives have a different return profile than traditional asset classes, adding an allocation can help lower overall volatility. This helps diversify the risks and return streams of the assets. A portfolio that includes alternative investments may provide greater efficiency.

Source: Miles Capital, Bloomberg, Barclays, HFRI

Hedge Funds are represented by the appropriate HFRI Index. Past performance is not indicative of future results. There is no guarantee that any investment will achieve its objectives. As with all investments, there is risk of loss of all or a portion of the amount invested. Index performance is shown for illustrative purposes only. An investor cannot invest directly in an index. Diversification does not ensure a profit or guarantee against loss.

RISK-ADJUSTED RETURNS

Alternative investments may provide strong risk-adjusted returns. A look at their performance versus US Stocks and Bonds over time shows compelling returns with less risk. We have provided hypothetical allocations below.

 

This means that an investor can change the distribution of their returns by adding an allocation to alternatives. The hypothetical allocation to hedge funds below has not historically changed the return profile but improved the standard deviation of the portfolio. Similarly, a balanced portfolio with a hedge fund allocation had 45% less volatility but only a 5% reduction in return. 

20 Year Rtn (3/31/18)           6.46%                                                     6.37%                                                         6.37%

Annual Std Deviation        14.86%                                                     8.65%                                                         7.99%

Sharpe Ratio                        0.30                                                         0.50                                                            0.55

Source: Miles Capital, S&P, Barclays, HFRI

Hedge Funds are represented by the HFRI Fund Weighted Composite, Equity is represented  by the S&P 500, Bonds are represented by the Barclays US Aggregate..

Standard deviation is a measure of the dispersion of a set of data from its mean, and is used to represent the historical volatility of an investment. The Sharpe Ratio is a measure for calculating risk-adjusted return.

Past performance is not indicative of future results. There is no guarantee that any investment will achieve its objectives. As with all investments, there is risk of loss of all or a portion of the amount invested. Index performance is shown for illustrative purposes only. An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product, which may substantially affect the performance data presented. Time period is April 1999 - March 2018. 

 

Potential Risks of these strategies include the following: Commodity risk – The value of commodities may be affected by overall market movements and factors affecting a particular commodity or industry. Any income received will be passed through to the Fund as ordinary income, which may be taxed at less favorable rates than capital gains. Derivatives risk - The use of derivatives by an underlying fund could lead to substantial volatility and losses. Derivatives may be illiquid and difficult to price or settle. An underlying fund may lose the entire value of the premium paid to purchase a put or call option. Hedging risk – although underlying funds may use certain hedging strategies intended to limit or reduce investment risk, these strategies may be unsuccessful. Leverage risk – the use of leverage typically magnifies both gains and losses. Liquidity risk – underlying funds may hold less liquid securities. An underlying fund may be unable to sell the security at an advantageous time or price. Real estate investment risk – an underlying fund’s investment in companies in the real estate industry will expose the underlying fund to the risks of owning real estate directly. Short sales risk – short sales have the possibility of unlimited losses. 
Although the Adviser seeks to allocate the Fund's assets among different alternative asset strategies to limit risk exposure, the Fund may still at times favor a strategy that performs poorly relative to other strategies. To the extent the Fund invests in alternative asset strategies that underperform the general stock market, the Fund will likely underperform relative to a fund invested primarily in the general stock market. Investors in alternative investments that utilize strategies such as the ones listed above should bear in mind that these products can be highly speculative and may not be suitable for all clients. Because the Fund invests in other funds, the Fund, as a shareholder of the underlying funds, indirectly bears its proportionate share of the operating expenses, including management fee of the underlying funds, in addition to the fees of the fund itself. For more information about the potential risks associated with these strategies, see below. 

HEDGE FUND STRATEGIES

Each strategy serves a unique purpose and may fulfill a specific purpose within a diversified portfolio.

 

PORTFOLIO CONSTRUCTION

OVERVIEW

Specific strategies can be utilized in an attempt to hedge specific risks, or a multi-strategy approach can be used as a comprehensive allocation for a client. No matter the approach, we believe hedge fund strategies should be viewed as a strategic addition to portfolios, with the potential to reduce tail risk and lower overall volatility without significantly impacting return potential.

Aggressive

April 1999 - March 2018

RETURN:                                            6.46%                                                     6.58%

RISK (STD DEV):                               14.86%                                                   12.85%               

SHARPE RATIO:                                 0.30                                                        0.36

MAX DRAWDOWN:                       (50.95%)                                                 (45.42%)

Source: Miles Capital, S&P, Barclays, HFRI

Hedge Funds are represented by the  HFRI Fund Weighted Composite,, Equity is represented  by the S&P 500, Bonds are represented by the Barclays US Aggregate. Risk (Standard deviation) is a measure of the dispersion of a set of data from its mean, and is used to represent the historical volatility of an investment. The Sharpe Ratio is a measure for calculating risk-adjusted return. A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained.

Past performance is not a guarantee of future results. There is no guarantee that any investment strategy will achieve its investment objectives. As with all strategies, there is a risk of loss of all or a portion of the amount invested. Index performance is shown for illustrative purposes only. Hypothetical models showing traditional portfolio allocations attempting to meet certain goals, plus these traditional models with hedge funds included. It is not possible to invest directly in an  index.

 

FACT VS. FICTION

Hedge fund allocations don’t provide diversification benefits in a crisis. 

While correlations do rise in a crisis, this is only a measure of directionality. To get the complete picture, you must consider the beta of the investment – this shows the magnitude of the impact. Over the last 20 years, hedge funds have a historical beta of 0.35 to public equities, which means in down markets, they have historically lost 35% of public equity investment losses. In the two most recent equity bear markets, hedge funds outperformed public equities.  

Beta is a measure of volatility relative to the market. A beta of less than 1 means that the security is theoretically less volatile than the market.

Click here for the pdf of Fact Vs. Fiction 

Past performance is not a guarantee of future results.

 
 

 CONTACT US

FOR ANY INQUIRIES, PLEASE CALL OR EMAIL US:
OUR ADDRESS

1415 28th Street

Suite 200

West Des Moines, Iowa 50266

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Important Information

Investors in alternative investments should bear in mind these can be highly speculative products and may not be suitable for all clients.

An investor should consider the Fund’s investment objectives, risks and charges and expenses carefully before investing or sending money. This and other important information about the investment company can be found in the Fund’s prospectus. To obtain a prospectus, please call 1-844-838-2120 or visit www.milescapitalfunds.com and download one here. Please read the prospectus carefully before investing. 

The fund is distributed by Unified Financial Securities, LLC (Member FINRA). Miles Capital, Inc. is the investment advisor. Investment in the Fund involves risk, including the possible loss of principal. An investment in the Fund is not insured or guaranteed by the FDIC or any other government agency. 

Circumstances could create a situation whereby utilizing a hedge fund strategy could have the adverse effect of increasing volatility.

 

A Word About Risk

All investments involve risk, and the Fund cannot guarantee that it will achieve its investment objective.  The Fund’s returns and share price will fluctuate, and you may lose money by investing in the Fund.

Diversification does not ensure a profit or guarantee against loss.

Investors in alternative investments should bear in mind that these products can be highly speculative and may not be suitable for all clients.  Alternative strategies pursued by the Fund may be subject to a number of risks either directly or indirectly through its investments in other Investment Companies or other securities and investment instruments.  These risks include:

Allocation risk – the Fund may at times favor an asset category or strategy that performs poorly relative to other asset categories and strategies.

Commodity risk – investments in commodities and commodity-linked ETNS may subject the Fund to additional volatility.  The value of commodities may be affected by overall market movements and factors affecting a particular commodity or industry, including adverse weather conditions, diseases, embargoes, taxes and other political and regulatory developments.  Any income received from commodities-related investments will be passed through to the Fund as ordinary income, which may be taxed at less favorable rates than capital gains.

Concentration risk – if an underlying fund is concentrated in a particular industry or economic sector, events that affect that industry or economic sector will have a greater effect on the underlying fund than they would on a fund that is more diversified among a number of unrelated industries or sectors.

Credit and counterparty risk – the counterparty to a transaction with the Fund or an underlying Fund may be unwilling or unable to meet its obligations.

Currency risk – currencies in which an underlying fund’s investments are traded, or currencies in which an underlying fund has taken an active position, may decline in value relative to the U.S. dollar.

Derivatives risk, including futures risk and option risk – the use of derivatives by an underlying fund could lead to substantial volatility and losses.  Derivatives may be illiquid and difficult to price, and the counterparty to a derivatives contract may be unable or unwilling to fulfill its obligations under the contract.  An underlying fund’s use of futures could expose the underlying fund to gains or losses that far exceed the level of the underlying fund’s initial investment.  An underlying fund may lose the entire value of the premium paid to purchase a put or call option.

Equities securities risk – equity securities are subject to changes in the company’s financial condition over overall market and economic condition.  Small-cap stock may pose greater market and liquidity risks than large-cap stock.

Exchange-traded note risk – and ETN reflects the risk of owning the assets that compose the market index the ETN is designed to track.  The Fund’s decision to sell an ETN may be limited by the availability of a secondary market.

Fixed-income securities risk – rising interest rates typically cause the value of bonds and other debt instruments to fall, while declining interest rates generally increase the value of existing bonds and other debt instruments.  The issuer of a fixed-income security may default on payment of interest or principal. 

Foreign securities risk – investing in foreign issuers may involve risks not associated with US investments, including settlement risks, currency fluctuation, local withholding and other taxes, different financial reporting practices and regulatory standards, high costs of trading, changes in political conditions, expropriation, investment and repatriation restrictions, and settlement and custody risks.

Hedging risk – although underlying funds may use certain hedging strategies intended to limit or reduce investment risk, these strategies may be unsuccessful.

Leverage risk – the use of leverage typically magnifies both gains and losses.

Liquidity risk – underlying funds may hold less liquid securities.  When there is no willing buyer and a security cannot be readily sold, an underlying fund may be unable to sell the security at an advantageous time or price.

Management risk – the Fund’s performance is dependent upon the Adviser’s skill in selecting underlying funds and making appropriate investments.

Market risk – the price of securities held by the Fund or underlying funds may decline in response to world events and conditions affecting the general economy.

New fund risk – there can be no assurance that the Fund will grow to an economically viable size, in which case the Fund may cease operations, and your interest in the Fund may be liquidated at an inopportune time.

Other investment company securities risk – the Fund’s investment in underlying investment companies, including mutual fund and ETFs, exposes the Fund to the investment performance and risks of those investment companies.  The underlying funds in which the Fund invests will pay management fees, brokerage commissions, operating expenses and performance based fees to each manager it retains.  As a result, the cost of investing in the Fund may be higher than other mutual funds that invest directly in stocks and bonds.  There is no guarantee that any of the trading strategies used by the underlying managers will be profitable or avoid losses. 

Quantitative methods risk – the Adviser’s use of quantitative methods in managing the Fund’s portfolio may not be successful or work as expected.

Real estate investment risk – an underlying fund’s investment in companies in the real estate industry will expose the underlying fund to the risks of owning real estate directly, including economic downturns that have a negative effect on the real estate markets, possible lack of available financing, and changes in interest rates or property values.

Short sales risk – short sales have the possibility of unlimited losses.