Author Archives: Scalper1

Understanding Liquid Alternatives: Ask The Right Questions

Financial advisors and other professional investors often have a lot of questions about liquid alternatives, and for good reason. The investment strategies used in alternative mutual funds and ETFs are not straight forward by any means. Many use some form of leverage. Most utilize the ability to short securities, while others use a variety of derivative instruments to efficiently gain exposure to certain assets classes or securities. But when used properly, liquid alternatives can be an effective tool to mitigate risk, increase diversification and/or enhance returns. So what questions should advisors be asking? To answer that question, Cognios Capital , managers of the Cognios Market Neutral Large Cap Fund (MUTF: COGIX ), has produced a handy guide, “FAQ: Liquid Alternatives.” The eight-page white paper answers the following frequently asked questions: What is the difference between traditional alternative investments and liquid alternatives? What is the benefit of adding alternatives to my portfolio? How many different alternative strategies do I need? From where should I fund my alternative allocation? Are there risks that are unique to alternatives? Why not just invest in a multi-strategy fund? Why is there such a large difference in returns among the different types of alternative strategies? What does it mean to be Beta Neutral? How are fees and expenses reported for alternative mutual funds? Cognios’s white paper answers each of the above queries in great detail, devoting nearly a page to each answer. What follows is an abbreviated summary of the report. Traditional vs. Liquid Alts Alternative investments include assets such as commodities, currencies, and private equity; as well as public-equity strategies such as long/short equity, market neutral, and equity arbitrage. Traditional alternatives are subject to less stringent regulation by the SEC, have less liquidity and transparency than liquid alts, and are open to wealthy individuals and institutions only. Liquid alts offer similar exposures but through SEC-regulated mutual funds and ETFs, with daily liquidity and greater transparency. Benefits of Allocating to Alts Alternatives present many potential benefits, but perhaps the most obvious is their potential to improve the risk-adjusted return of portfolios through exposure to assets and strategies with low correlation to traditional stocks and bonds. How Many Alts are Needed? According to Cognios, a 10% to 25% allocation “may be an optimal range” for individual investors. As for the optimal number of different alternative strategies, this depends on investors’ desired outcomes. Alternatives aren’t a single “asset class” – a variety of strategies pursue a variety of different outcomes. Funding an Alts Allocation Should alternatives be funded from the equity portion of a portfolio, the fixed-income sleeve, or a separate “alts” sleeve? According to Cognios, there is no one right time to add alts to a portfolio – and similarly, there is no one right way to fund them. Unique Risks Cognios cites the following as unique risks to investing in alts: Insufficient manager experience Limited track records Difficult-to-understand strategies Multi-Strategy Funds Investing in a multi-strategy fund leaves the decision of which strategies to invest in and how much to allocate to each strategy up to an outside manager. While this can be beneficial, multi-strategy funds sacrifice customization for ease. Furthermore, multi-strategy funds aren’t always fully diversified within the alts space, so certain single strategy funds may be needed to complement multi-strategy holdings. Dispersion of Returns Since alts aren’t a single “asset class,” it makes sense that there would be a wide dispersion of returns across the different alternative assets and strategies. But even within a given strategy, wide dispersion between the best and worst performers is common, since many funds operate different sub-strategies and most are unconstrained by benchmarks. Beta Neutrality A “beta” of 1.0 indicates 100% correlation with a given benchmark. Equity market neutral funds pursue “beta neutrality,” meaning a beta of as close to 0.0 as possible. This way, their returns are isolated from the fluctuations of the broad market. Liquid Alts Fees While alternative mutual funds certainly have lower fees than their hedge-fund counterparts (in most cases, at least), their fees aren’t necessarily as straightforward as those of traditional mutual funds. This is because strategies that engage in short-selling incur related costs, whereas traditional mutual funds don’t sell short, and thus don’t incur these added charges. Download the full guide for complete answers to the nine questions (linked above). Jason Seagraves contributed to this article.

Apple Vows Fight With Feds To Maintain Smartphone Privacy

Apple ( AAPL ) CEO Tim Cook has taken a hard line against government efforts to unlock password-protected smartphones. But Apple’s pushback to a new federal demand this week could stymie the San Bernardino, Calif., terrorist investigation. This twist puts the company at the center of a long clash with government over technology industry security and privacy, and in a public relations pickle. In an open letter to customers late Tuesday, Cook vowed to resist government orders to break its smartphone encryption. He said there is much more at stake than complying with one government request to access data on one iPhone. A federal judge on Tuesday ordered Apple to provide “reasonable technical assistance” to the FBI to unlock an iPhone belonging to one of the killers in the San Bernardino  shootings. The order calls for Apple to create software that can get around or disable the security option that erases data from an iPhone after 10 unsuccessful attempts to unlock it. Syed Farook and his wife, Tashfeen Malik, shot and killed 14 people on Dec. 2. The radicalized Muslim couple, described in press reports as supporters of terror group ISIS, later died in a gun battle with police. Complying with the court’s order would create a “dangerous precedent,” Cook said. The government’s demands threaten the security of all of its customers, he said. “Some would argue that building a backdoor for just one iPhone is a simple, clean-cut solution. But it ignores both the basics of digital security and the significance of what the government is demanding in this case,” Cook said. “While the government may argue that its use would be limited to this case, there is no way to guarantee such control.” If the backdoor becomes available, hackers and criminals will try to exploit it, Cook said. And the federal government, which has shown a willingness to spy on its own citizens through the National Security Agency, also could seek more access to smartphones. Cook said he believes the FBI’s intentions here are good, but that ramifications of their demands are too far-reaching to ignore. “The implications of the government’s demands are chilling,” Cook said. “The government could extend this breach of privacy and demand that Apple build surveillance software to intercept your messages, access your health records or financial data, track your location, or even access your phone’s microphone or camera without your knowledge.” Cook said Apple has no sympathy for terrorists and has cooperated with the FBI to the best of its ability. The court says it isn’t asking Apple to break the phone’s encryption, but rather to “bypass or disable the auto-erase function whether or not it has been enabled.” That way, the government can try to crack the password using “brute force” — electronically entering millions of combinations without risking deletion of the data. The Electronic Frontier Foundation, a leading nonprofit organization that defends civil liberties in the digital world, has come out in support of Apple in the case. “For the first time, the government is requesting Apple write brand new code that eliminates key features of iPhone security – security features that protect us all,” Kurt Opsahl, deputy executive director and general counsel for the EFF, said in a blog post . “Essentially, the government is asking Apple to create a master key so that it can open a single phone. And once that master key is created, we’re certain that our government will ask for it again and again, for other phones, and turn this power against any software or device that has the audacity to offer strong security.” Opsahl went on to note that “once this master key is created, governments around the world will surely demand that Apple undermine the security of their citizens as well.” Digital rights group Fight for the Future also has spoken out about the federal court order. “Governments have been frothing at the mouth hoping for an opportunity to pressure companies like Apple into building backdoors into their products to enable more sweeping surveillance. It’s shameful that they’re exploiting the tragedy in San Bernardino to push that agenda,” Evan Greer, Fight for the Future’s campaign director, said in a blog post . “Security experts agree that any weakening or circumvention of security features on a phone puts everyone in danger.” Wendy Patrick, a business ethics and legal expert on the faculty at San Diego State University, said the Apple case raises the question of whether we can have digital security when there are national security concerns. “The public may have to give up some measure of digital privacy to make sure we stay safe from terrorists,” Patrick told IBD. “A lot of people believe that national security is paramount.” But Apple is worried about damaging its relationship with its customers if it makes iPhones vulnerable to hackers and government snoops. It sees the creation of a slippery slope by setting a precedent in this case, she said. U.S. Magistrate Judge Sheri Pym gave Apple five days to contest her ruling on the grounds that it might be unduly burdensome. Apple is likely to do so and the case could be at a stalemate for some time, Patrick said. Image provided by Shutterstock .