A HEDGE FUND might allow you to cash out just once every three months. By contrast, mutual funds provide daily liquidity, meaning you can get out at the end of any day that the market is open, while ETFs can be bought and sold throughout the trading day. For that reason, mutual funds and ETFs that pursue hedge-fund-like strategies are sometimes referred to as liquid alternatives or simply “liquid alts.” What sorts of funds are available? Here is a sampler:
Keep three caveats in mind. First, some liquid alt funds have steep annual expenses. Second, the strategies involved can generate big annual tax bills, so the funds are best held in a retirement account. Third, these funds all represent a bet on active management—a bet that historically hasn’t panned out.
Our Humble Opinion: You should never buy a fund unless you fully understand its strategy. If you don’t, there’s a risk you’ll suffer an unpleasant surprise—and end up selling out, possibly at the worst possible time. That’s why we think most investors should stick with easy-to-understand alternative investments, such as funds that focus on gold stocks and real estate investment trusts.
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