Alternative funds show mixed results over past month

By Jessica Toonkel

(Reuters) - Alternative funds, which investment companies have long pitched to be the solution for clients during volatile markets, have seen mixed returns during the past month's stock market swings, according to Morningstar.

These funds are designed to generate returns that are not correlated to the equity or bond markets. And while some categories of alternative funds did well from the market peak on July 20 through Monday, others did not.

To see how alternative funds fared over the past fund, go to http://reut.rs/1KN6lD9

One category that shined was "bear market funds," which are supposed to go up when stock markets go down. These funds returned over 19 percent during that period, compared to the S&P 500 Index, which was down 10.8 percent, according to Morningstar.

However, five of the seven categories of alternative funds tracked by Morningstar had negative returns over the past month.

U.S. long/short equity funds had the worst returns, down 5.5 percent for the month.

Meanwhile nontraditional bond funds, which include unconstrained go-anywhere bond funds, were down 1.6 percent for the period, compared to the Barclays U.S. Aggregate Bond Index, which returned 1.3 percent.

"A lot of these funds are reducing the downside or mitigating losses but investors would still have been better keeping their money in cash," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

Also, these funds tend to be more expensive than average core equity and bond funds. For example, the average expense ratio for a U.S. equity fund is 1.30 percent, and 1.85 percent for long/short equity funds, according to Morningstar.

Meanwhile the average expense ratio for an intermediate bond fund is 0.85 percent, compared with 1.85 percent for unconstrained bond funds.

(Reporting By Jessica Toonkel; Editing by Alan Crosby)

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