Alternative investing is hot. But you already knew that. Assets under management in hedge funds, private equity, venture capital and other formerly obscure realms have been exploding for the better part of a decade now. Slightly less obvious in the financial universe is the trend’s influence on the conventional money management business. For several years now, more and more investment shops are offering something a bit different, which generally means indulging in portfolio engineering of one kind or another. One quick measure of the trend can be found in the growing list of mutual funds and ETFs for which the underlying strategy can’t be described in 10 seconds or less.
Meanwhile, selling beta with minimal tweaking is a commodity, of course, and it’s becoming more so all the time. There’s nothing wrong with beta, which comes in a rainbow of flavors. Indeed, the art/science of blending various betas offers robust opportunities for the strategic-minded investor. Nonetheless, alternative betas in a single-fund format are all the rage in the 21st century and, as it turns out, it’s not a bad business either. Caveat emptor applies for buyers, of course, but from a distribution perspective the alternative marketplace is manna from heaven because it’s an enormously profitable business. Why? Because fees are usually much higher for alternative strategies compared with conventional money management concepts generally. No wonder that a fair share of the brain drain on Wall Street since the 1990s has beat a path into the alternative space.
It seems as though no one’s immune to the trend, including Vanguard, which sold the first plain-vanilla beta fund to the public back in 1976. Since then, Vanguard has broadened its index fund menu considerably. But the allure of non-conventional betas is too enticing to ignore, and so late last year Vanguard offered its first alternative investing fund for public consumption: Vanguard Market Neutral Fund (VMNFX). To be precise, Vanguard adopted an existing market neutral fund (the former Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity) and rebranded it.
The event seemed like something of a minor milestone to this editor. With that in mind, we interviewed a spokesman at Vanguard for the March issue of Wealth Manager.