San Francisco-based Forward Management is once again embarking on an alternative roadshow with a group of alternative mutual funds in hopes of educating advisors on the benefits of alternative investing and, ultimately, winning business.

The firms sponsoring the 2012 tour include Altegris, Driehaus, Eaton Vance, Forward, Guggenheim Investments, JP Morgan, Fortigent, Morningstar and Ramius.

Their message? It's time to rethink portfolio construction because the traditional style-box approach just isn't working. The group is also lobbying advisors to view alternative products as less volatile and risky than traditional mutual funds.

Heading the initiative is Jeff Cusack, Forward's president of distribution, who recently gave Money Management an update on how the road show is shaping up.

A Seven-City Tour

The series of events, which kicks off at the Morningstar Auditorium in Chicago, will make additional stops in Philadelphia (April 12), Denver (May 1), Dallas (May 3), Palo Alto, Calif. (May 15) and Seattle (May 17) before wrapping up in New York on May 22.

Cusack says that initial feedback about the idea from advisors has been "extremely positive" with some 94% of advisors who attended saying that the programs are meeting their expectations. "If we ask them whether or not they're increasing their allocations to alternatives, almost everyone say they are," he says.

While the 2011 roadshow served as a broad introduction to alternatives, this year's seven-city tour emphasizes ways to utilize them in portfolio construction. "What we're trying to do with this one is talking about how to think about incorporating these strategies in your portfolios and understanding that the traditional style-box approach isn't doing everything that we would hope it do to provide diversification and risk management," says Cusack.

So far, each road event is averaging more than 100 advisors. The New York stop, which is about a month out, currently has about 164 signups, up from 125 last year, according to Cusack. "It would be a lot more but we're sold out and we have a waiting list now. It's interesting that people are already talking about next year," he claims.

Volatile or Just Less Constrained?

So how much are advisors actually allocating to alternative products?

According to Cusack, advisors who start with between 5% and 10% allocation to alternatives eventually increase it to between 25% and 35% of their portfolios.

"When they begin to get more comfortable with this mix of alternatives, they begin to rethink their overall portfolio construction and then what we see is a reversing of portfolio construction where advisors are beginning to look at alternatives as their all-weather risk-managed core, meaning the portfolio doesn't require the market to be up to make money," he says.

Cusack cautions advisors against comparing alternative mutual funds with their more traditional limited partnership counterparts.

"Many people have in their minds that alternatives equal high volatility and that may be the case for traditional alternatives in an LP structure where you might have 10x to 30x leverage," he says. "But when you're dealing in a '40 Act structure with a max of 2x long and 1x short, you're dealing in a much more constrained environment so the volatility of these strategies are far less than originally thought."

In fact, he thinks that alternative offerings should be labeled "less constrained" to better reflect their characteristics. "Someone would think of a large-cap core manager as safe and liquid. But by prospectus, they're require to have no more than 5% cash in the portfolio at any time compared to a manager who can be 100% long and 100% short and has the flexibility to manage market exposure. Which of those strategies are riskier?"

And in a space where alternative funds can charge upwards of 200 basis points for expenses each year, Cusack, who says it's better to look at outcome than expense ratios, thinks the higher fees are justified because alternative funds are doing more in terms of managing market risks and using leverage.

"Some of our funds have a 150 basis points all in compared to 2/20 and quarterly liquidity, and we're a fraction of the cost of an LP," he offers.

Making the '40 Act Leap

Hedge funds such as New York-based Hagin Investment Management, Minneapolis-based Whitebox Advisors and Kansas City, M.O.-based RiverPark Funds have all recently converted their funds to '40 Act funds to attract a wider audience. Forward Management's Tactical Growth Strategy was also formerly managed as a hedge fund betting primarily on futures and exchange-trade funds, lends itself very well to a mutual fund, according to Cusack.

His reasoning? It doesn't use any leverage, can be long and short but not long and short at once so it's not market neutral.

"I would recommend to folks who are in the hedge fund world to take a hard look at products that they have that might lend themselves to a '40 Act structure, and give serious consideration to diversifying their distribution," he says. So what are the chances of success for a long-only manager who wants to jump on the alternative bandwagon?

Cusack thinks that a long-only manager who gets into the alternative space "may not end very well" because there is a different skill set involved in shorting.

In general, the alternative mutual fund space is in its infancy, he contends.

"We're at the very, very early stages. When 33% of all the assets in the last few years in the wirehouses have been in cash or Treasury bills, to me there's something going on there that's new and different," Cusack says. "Clients have a lack of faith in the traditional approach to investment strategies, and, perhaps, advisors have a lack of faith in the traditional approach to investment strategies."

He thinks that will change, over the next five years, as long as the benefits are explained well.

"I don't think we're in the first or second inning right now of a complete rethink of portfolio construction. I think we're singing the national anthem,'' he says. 

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