Alternative mutual funds are hot and signs are pointing to a greater expansion of the growing asset class.

According to the latest tally from Morningstar, alternative and commodities funds had strong March inflows, collecting $2.0 billion and $1.4 billion, respectively.

For the quarter, alternatives saw inflows of $9.2 billion, the best three months on record. All told, the asset class currently holds $100 billion in assets.

That's still a small sliver of the $13.5 trillion held in mutual funds. But firm has been on the cutting edge of the nascent alternative mutual fund space even before it became en vogue.

Chicago-based IRON Financial was founded in 1994 as a separately managed account outfit and launched its flagship and sole mutual fund, the IRON Strategic Income fund, in October 2006.

The Morningstar 5-star rated fund current has $448 million in assets under management and goes long and short on high-yield fixed income securities and fixed-income derivatives via other funds. Its current holdings include the Ivy High Income Fund (WHIAX), Fidelity Capital & Income Fund (FAGIX) and PIMCO High Yield Fund (PHDAX).

The fixed income fund was launched to address what the firm perceived as a need; a true alternative fund that provided interest-rate and hedging protection.

"There were virtually no fixed-income funds in 2006 that were truly trying to hedge interest rates and credit exposures," says Aaron Izenstark, co-portfolio manager, Managing Director, chief investment officer.

Izenstark, along with co-founder Howard Nixon, began his career as an exchange member of the Chicago Board of Trade, and his goal was always to deliver a hybrid product that could also focus on low volatility and high yielding investment strategies.

"In terms of fixed income you always have interest-rate risks and credit risks and most of the funds out there, if they're opportunistic, they're just going to go from sector to sector," he says.

"We're not just trying to protect the downside, but we're trying to capture as much of the upside as possible. When you look at the credit funds out there, they're trying to hedge everything so while they're not losing money, they're also not making much money.''

Case in point: The fund dropped 8.04% in 2008 compared to its benchmark, the Dow Jones Credit Suisse Hedge Fund Index, which lost 19.07%. A year later, the fund rebounded nicely to the tune of 35.60% while its benchmark gained 18.57%.

The fund adds value in adverse market conditions such as the 2008 financial crisis, which Izenstark described as "a great year" for the fund given the tumultuous market conditions.

The toughest periods for the fund is when nothing is going on and the market just looks like it's plodding along "because then it looks like you don't have to do anything," Izenstark says.

"During periods like 2012 we were up 8.15% so we were happy with that."

So what does the future hold for the IRON Strategic Income fund and fixed income funds of all shapes and sizes? There's reason to be cautiously optimistic "because the 10-year Treasury yields are at 1.7% or so and that's really a negative real yield," Izenstark says.

"We still think it's a positive environment for credit in general because there are opportunities on a bond-by-bond portfolio,'' he says. "Going forward, it's going to continue to be a high-risk, high-volatility marketplace where it's possible that anything could pop up."

Everything including the recent Boston marathon bombing, right? Not necessarily.

Even before the bombings took place, the real issue affecting the fixed income market was the drop in gold prices, in his estimation. The precious metal is down 20% in 2013, and nearly 30% from its all-time trading highs over $1,900 per ounce in September 2011, according to Reuters.

"When you start having gold and crude oil prices drop pretty heavily, people start getting nervous about deflation, which then brings risk to credit," Izenstark says.

Another current theme that is worrying bond mutual fund purveyors is investors shifting their assets from bond investments to equities, dubbed the "Great Rotation". However, Izenstark isn't losing sleep over this. "There's a continuous trickle from high quality bonds into equities and the lower quality credit space because this is the only place to currently get yields. This is the space we play in because we're typically looking for credit opportunities so this has been a benefit to us," he says.

So what does keep Izenstark up late at night? Is it the fact that his fund is below $500 million even though it's been around for almost seven years? Not quite. "We're a boutique shop that's more concerned about continuous return stream that we produce than being a $20 billion fund," he says.

"Over the last few years we've hired more on the marketing and sales side but our biggest focus is on the research and asset management side,'' Izenstark says. "We've hired more researchers because we think we can crunch more data and come up with more opportunities than to just market the fund and little by little become an index. The focus for us is getting our name out there in terms of providing value over just buying an index."

The alternative space is "not a flavor of the month" for IRON.


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