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Morningstar Says These Alternative Funds Can Help Protect Investors From Volatility


With the market in a downturn, it’s no secret bonds haven’t been the hero many investors were expecting in 2022. Typically when stocks are down, bonds are where most investors flock to. But not this time. However, that doesn’t mean aren’t any other alternatives for investors to seek shelter. Morningstar recently identified funds that can provide safety-nets. And that safe place comes in the form of alternative funds. We’ll discuss what alternative funds are and which can protect investors from volatility.

financial advisor could help you create a financial plan to protect your investments and identify new opportunities to make money.

What Are Alternative Funds?

Alternative funds offer broad long-term or short-term focus on non-traditional investments — that is, excluding stocks, bonds or cash. They can come in the form of mutual funds or exchange-traded funds (ETFs) that look to invest in other areas of the market like real estate, private equities or venture capital to name a few.

With the variety of options alternative funds provide, naturally, they are intended to provide diversification in your portfolio and shield you you from volatility you may be exposed to in more traditional securities. That creates unique, complex strategies for alternative funds that can offer varying results.

“Alternatives are a very diverse space but they all aim to generate returns that are uncorrelated with stocks and bonds,” Morningstar Investment Management Senior Investment Analyst Michael Budzinski said.

However, alternative funds on average have been on the downside. The average alternative fund in 2022 is down 2.74%. But that’s still better than the Morningstar US Index, which is down 14.4% and the Morningstar US Core Bond Index is down 12.6%.

Alternative Funds That Are Outperforming

According to Morningstar, systematic trend funds are the best-performing group among alternative strategies this year. The average returns inside systematic trend funds are up 17.15% for the year. Systematic trend funds are built to create strategies that not only locate short-term trends but also profit from them across different markets. These funds perform well when clear, direct shifts in the market are up or down.

Equity market-neutral funds have also seen positive gains, as the funds in the category are up 4.95% in 2022. These neutral funds work to hedge against direct market exposure by taking offsetting long and short positions. Then, the equity market-neutral fund is measured between long and short position exposure.

Bottom Line

SmartAsset: Morningstar has an eye on funds that can protect investors from volatility

Alternative funds can be a useful strategy for your portfolio when you want to diversify. If you decide to use alternative funds, make sure that you invest in them early. Waiting until the market goes down to invest likely means you missed an opportunity to earn quality gains. Alternative funds also are also not perfect. Some alternative funds have higher fees than your traditional fund which can negatively impact the overall returns you were looking for. But before you make a decision on alternative funds, make sure that you do your homework and decide if it matches your investment strategy and risk profile.

Tips for Investing

  • Consider talking to a financial advisor about whether investing in alternative funds makes sense for your financial plan. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool can match you with vetted financial advisors in your local area in five minutes. If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
  • Understanding your risk tolerance and investing goals is a key part of any long-term financial strategy. Also, an investment calculator will help you to better visualize your goals and preferences.

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