Financial advisors, wealth management executives and other research professionals have been, more or less, wishy-washy on the topic of a required track record in a new alternative mutual fund. Some will still demand a three-year track record, while others will be willing to take into account the lifespan of a similar strategy in a different form, say a hedge fund, that has been running for longer.

But Adam Patti, CEO of IndexIQ, which provides indices, ETFs, mutual funds and hedge fund replication strategies, suggests investors wait it out for a longer track record.

"Investors need to be careful of what they're buying," he said, given the rapid proliferation of alternative products. "A few years ago, no one was talking about alts. Now you walk into a conference, and almost everyone is an alts manager," he said.

Instead of naming a specific time period that investors should look at, Patti suggests they wait for the product to see a whole market cycle, including a bull and a bear market. That could take anywhere from three to five years or longer, Patti explained.

And he might be right, as managers are touting alternative strategies as something that can help with downside protection and are uncorrelated to traditional investments. But during the last market crash, in 2008, a lot of strategies and funds moved in the same direction, with equities losing about 40 percent and hedge funds dropping by 20 percent, on average.

"Part of the problem with the industry is that everyone is solving yesterday's problem today," Patti said. "Everyone has got liquid alternatives and smart beta products now, but you have to pull back the onion and talk about: what is it? Is it liquid? Is it transparent? What are the fees? And how does it work?"

Patti declared: "It's a marketing game a lot of the time."

Patti's own hedge fund replication strategy mutual fund (QAI) reached a five year track record this year. The IQ Alpha Hedge Strategy Fund (IQHOX) returned 5.63 percent in the past five years through the end of March.

 

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