Firm Sees Alternative Investments Winning
More By Losing Less
FINANCE: Co. Puts 45% in Alternatives as Hedge for Bad Times
By MICHAEL LIPKIN
Friday, June 5, 2015
For decades, the basic makeup of an investment
strategy has been 60 percent stocks and 40 percent
bonds. Investors looking to further diversify might put
up to 10 percent into so-called alternative investments
that didn’t correlate to stock returns, including
commodities, private equity or even artwork.
But the definition of alternatives has loosened as
strategies typically employed by hedge funds to
minimize volatility became more widely available to
smaller investors. It’s this set of alternatives Dick
Pfister hopes to seize on with his new investment
advisory firm, AlphaCore Capital, dedicating nearly
half of his clients’ assets to alternatives. After
launching publicly in February, it now manages $30 million in assets.
Pfister, 43, said alternatives are actually the conservative play. The market is approaching the second-longest
bullish streak since the late 1950s without a 20 percent correction, and bonds’ extremely low 2.25 percent
yields aren’t enough to protect investors, Pfister said.
Yale Model
Pfister was one of the founders of La Jolla-based Altegris, a creator of alternative funds which helped roll out
one of the first actively managed futures mutual funds in 2010. Pfister left in November after Altegris was
bought twice and he needed to decide what to do with his substantial payout. Investment advisors solicited him
in droves, but Pfister feared the traditional 60/40 split wouldn’t safeguard his money.
That jump-started the premise of AlphaCore, which will maintain a relatively static 45 percent alternative
allocation for its clients in managed futures, global macro, event driven and relative value funds. The rest will
be invested in stocks, bonds, real estate and commodities. It’s a strategy borrowed from institutions with
multibillion-dollar endowments, called the Yale Model.
“(Alternatives) won’t be something that you flippantly put in as a satellite piece,” Pfister said. “It’s going to be
the actual core allocation.”
While they smooth out losses during a down economy, the drawback of alternatives is that they don’t perform
as well during strong markets. But Pfister pointed to a statistical model of a 55-year-old who invested $1
million in the stock market in 1999. Assuming he maintained that investment through the tech bubble of the
early 2000s and the recession, he would wind up with $2.49 million by 2015, with an annual rate of return of
5.8 percent. With a 60/40 split of stocks and bonds, the results are largely the same with a 5.7 percent return,
though there are fewer losses during downturns.
Turning to a backtracked model approximating AlphaCore’s strategy, that same investor would have about
$3.3 million in 2015 with an annual rate of return of 7.6 percent. While the investments grow less quickly
during the post-2003 and 2008 recoveries, they wind up faring better because they lost far less during the
falling markets, Pfister said.
“You win more by losing less,” he said, repeating the company’s mantra. “To do that right, you’ve got to have
a significant allocation to hedged strategies.”
Alternative investments, however, are still considered to be somewhat risky due to their complexity and higher
fees compared to traditional plans. Hossein Kazemi, a special senior advisor for the Chartered Alternative
Investment Analyst Association, said new investors should avoid alternative funds.
“You have to make sure you’re getting something extra for your fund,” he said. “There are plenty of funds that
don’t add any value.”
Eye on the Fees
Marc Roland, a managing partner at Dean Roland Russell in San Diego, said that some mutual funds
promising hedge- fund-like strategies for smaller investors charge hefty fees and invest in little more than
stocks and bonds.
“Unless you’re an insider, the fees can just eat you up,” he said, adding they can go as high as 2 percent of
assets managed plus 20 percent of the fund’s profits.
Pfister said the funds he’s using charge about 1.1 percent overall and AlphaCore won’t charge more than 1
percent. He agreed that AlphaCore would have underperformed in the past six years as the market rebounded,
but that the goal was to manage for an eventual decline.
“The next 20 percent correction in stocks will be when everyone puts their money into alts,” he said. “You’re
supposed to buy fire insurance before the fire.”
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