Morningstar - Q3 2022 - 21

Dispatches
Global Briefs
TRENDS
Alternatives Finally Bear Fruit-but Take Care
Category
U.S. Large Blend
U.S. Mid Blend
U.S. Small Blend
Foreign Large Blend
Foreign Small/Mid Blend
Diversified Emerging Markets
U.S. Real Estate
Intermediate Core Bond
Corporate Bond
High-Yield Bond
Active Funds' Success Rate
10-Year
1-Year
Alternative strategies are having their moment
in the spotlight this year. The average strategy in
the systematic trend Morningstar Category
is up 16% through June 30, and other alternative
categories have also held up well.
But before buying in, investors need to understand
what these strategies do and how they will
behave in different environments. Though many in
the industry apply the alternative moniker
broadly, at Morningstar we think more nuance is
necessary. We group these strategies into three
0%
broad buckets-modifiers, diversifiers, and
opportunistic-that describe the role they can
serve in a portfolio.
Modifiers are correlated with the common risk
factors of equities and fixed income but
seek to " modify " that exposure with tools like
derivatives or short-selling. Diversifiers
offer exposure to a broader set of risk factors that
we call nontraditional or alternative betas.
These include event-driven trades and equity
market-neutral strategies. Opportunistic
25
50
Average Year-to-Date Returns for the Liquid Alternatives Morningstar Categories
Diversifier
Systematic Trend
Opportunistic
Macro Trading
Event-Driven
Equity Market-Neutral
Relative Value Arbitrage
Multistrategy
Options Trading
75
Lowest-Cost
Funds 10-Year
strategies, such as systematic trend funds,
focus on absolute returns and aim for positive
returns in all markets.
There are two ways to handle alternatives in a
portfolio: Either carve out a thoughtful,
appropriately sized, long-term position that fits
your risk tolerance or ignore them altogether.
Bobby Blue is a senior manager research analyst for
Morningstar Research Services LLC.
19.2
29.2
31.4
48.6
75.0
69.0
50.0
54.8
33.3
76.9
100
*
Highest-Cost
Funds 10-Year
1.3
4.0
13.9
18.4
40.0
53.3
30.8
20.6
25.0
36.7
*
Modifier
Benchmarks
Derivative Income
Long-Short Equity
Morningstar US Core Bond Index
Morningstar Global Markets Index
Return
30%
16.0
3.2
-2.1
-3.3
-4.2
-5.6
12/31/2021
01/31/2022
Source: Morningstar Direct. Data as of 06/30/2022.
02/28/2022
03/31/2022
04/30/2022
05/31/2022 06/30/2022
-9.7
-10.2
-11.4
-11.5
-20.9
15
15
-30
How Russ Kinnel
Diversifies by Alpha
AMERICAS
United States
When building a portfolio as an investor, you
naturally want to balance asset classes
and risks. You want value and growth. Domestic
and foreign stocks. Short-term bonds and
long-term bonds. High-quality and junk bonds.
Small-cap stocks and large caps.
But when fund companies and consultants
combine managers with styles that
overlap, they often think in other terms.
They think about diversifying by sources of
alpha. One subadvisor might focus on
momentum, another on fundamental analysis,
a third on high quality. All of those have
some overlap, but they also have key differences
that can make an additional subadvisor
a good thing because they have different
sources of alpha.
morningstar.com/products/magazine
21
https://www.morningstar.com/authors/2235/bobby-blue http://www.morningstar.com/products/magazine
Morningstar - Q3 2022

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