Q: After listening to a podcast about the ProShares Morningstar Alternatives Solution ETF recently, I am wondering whether I should start to look into alternative investments as a means of reducing risks during a bear market. What is your opinion of Long/Short, Merger, Managed Futures, Hedge Replication alternative funds? Are they suitable for use in a buy-and-hold strategy?
A: Absolutely not. The only way to use these products is as a market timer and that’s very difficult to do. All of the evidence is that even professionals fail at market timing with securities that are built to go up when the market goes down. It’s a great sales pitch but there is no evidence it works. If you reviewed all the newsletters that apply these kinds of methods, you’d discover they virtually all underperform a traditional buy-and-hold strategy with an appropriate amount of fixed income. The Hulbert Financial Digesttracks most of the major investment newsletters and the long-short newsletters have terrible results.