Caution: Alternatives to Traditional Bonds Have Big Risks
A recent Wall Street Journal article by Eleanor Laise discussed the new alternative fixed income investments that are available. Clearly, these new alternatives are an attempt to satisfy the need for something to replace traditional bond funds as interest rates rise. The article makes a point to clarify that while some of the funds have performed well, the risks and relatively high expenses make them unsuitable for many income seeking investors. As with any new or alternative investment, the complex nature of the investment, the overall risk and volatility and the potential loss of principal is usually not thoroughly explained as well as the potential upside benefits.
Loomis Sayles & Company and Driehaus Capital Management LLC have recently launched their alternative funds that use various complex tactics like betting against the South African rand or buying credit default swaps. Because of the increased fees and expenses, the fund managers are essentially required to use derivatives, credit default swaps, interest rate bets, currency bets and fast trading in and out of market sectors in order to produce the same return of other investments with lower costs. For example, the average intermediate term bond fund has expense charges of 0.95% of assets, while the Loomis Fund launched at the end of last year charges 1.95% and the Driehaus Select Credit Fund charges 1.75%.
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