Due Diligence Done For You: The Importance of Robust Due Diligence in Alternative Mutual Funds

August 24, 2018

All too often, investors make one of three choices regarding alternative or lower-correlated mutual funds. Some do not invest, as they correlate “different” with “risky”. Some choose to invest in the highest performing funds, considering them as just another growth driver. And some investors attempt to do their own due diligence and select a full complement of lower-correlated funds.

 

Many lower-correlated strategies have been shown to have a lower standard deviation than traditional equities, oftentimes having a volatility level closer to fixed income. And, while alternative mutual funds may provide growth for the portfolio, they should be evaluated as a complementary set of investments that have the potential to provide more consistent returns, rather than a replacement for an equity strategy.

 

To do the work of identifying, researching, and selecting a diversified fund portfolio of 15 to 20 managers across desired lower-correlated strategies, it is important to leverage a robust due diligence process that includes both quantitative and qualitative factors. 

 

Here’s a closer look at how our experienced team carefully selects managers for our clients and our holistic mutual fund from a well-researched list.

 

Quantitative Factors
Quantitatively, we evaluate a host of return-based information, including absolute returns, risk-adjusted returns, performance during difficult periods, historical beta, Sharpe ratios and underlying factor exposures. First and foremost, it is paramount to success to make sure we understand what risks we, and our underlying alternative mangers, are taking.

 

We use this data to identify track records that align with or match what we are trying to accomplish within our portfolios. For this process in each separate type of strategy, we may begin with a set of 50 managers and narrow that down to five or six that may directly address a portfolio need.

 

Qualitative Factors
Qualitative research is ultimately much more important because this is where you identify whether a manager’s track record was due to luck or is based on their repeatable process. There are some common themes among all the strategies: assess the team – the people, their pedigrees and experience, and their capabilities. It’s also critical to assess their process consistency, their adherence to their compliance rules and their operational infrastructure, all of which is common across all types of strategies.

 

However, there are also some unique, strategy-specific factors that should be considered. There are good examples in the managed futures strategy. One unique consideration is to evaluate how they create their macro models and how they think about those models, test them, incubate them, and how long it takes before they put them into practice. 

 

Another consideration for managed futures is how the managers define and think about the terms of their models. Managed futures managers will typically have short-term models, medium-term models and long-term models — all of which can mean something different to each fund. How do they define those terms and allocate across those models? If they have a heavy allocation in short-term models they’re more likely to under-perform in periods where we have a lot of asset class reversals. And if they have a heavy allocation in long-term models they’re likely to under-perform when the asset trend turns because they’re going to be slower to pick up that change. 

 

Finally for a managed futures manager, the other major consideration is data. Fundamentally it is a model-driven approach, which means it’s only as good as the inputs. So where do managers source their data and how do they scrub it to ensure its high quality?

 

Conclusion
Alternative investments may complement the investments that already exist in the portfolio, provide strong risk-adjusted returns, and help mitigate the effects of a negative market environment. 

 

However, manager selection, and therefore due diligence are critical. 

Our team has a long track record in alternatives and manages assets for all types of institutional and professional investors. We perform thorough and robust due diligence on the funds we invest in for clients and provide this expertise to our clients by carefully selecting a basket of diversified investments from our well-researched list. We do this so our clients don’t have to.

 

A multi-manager, multi-alternative mutual fund may offer a core allocation to alternatives that provides strong relative risk and participation in an investment focused on more consistent returns.

 

 

 

An investor should consider the Miles Capital Alternatives Advantage 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.  Please read the prospectus carefully before investing... [Click here for important risk and definitions of terms.]

 

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. 

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