Devising Portfolios with Alternative Investments (Active vs. Passive)

There are now two main styles of management for portfolios with alternative investments (active and passive). Given that investors can select alternative mutual funds, diversification has become easier to achieve. Mutual funds are quite common and owned by many investors, whether as part of a retirement plan or in a non-retirement account such as a wrap account or fee-based account. Mutual funds have plenty of attractive features. However, performance tends to vary, sometimes outperforming the indexes while other times failing to outperform them. Alternative mutual funds are no different. Persistence also is an issue. While one might have an initial aversion to investing in a leveraged buyout fund (private equity funds as they are frequently called), private equity or a leveraged buyout funds can be defined as: To briefly review the concept, in an LBO a small group of equity investors, usually including current management, acquires a firm in a transaction financed largely by borrowing. The debt is serviced with funds generated by the acquired company’s operations and, often, by the sale of some of its assets. Generally, the acquiring group plans to run the acquired company for a number of years, boosts its sales and profits, and then take it public again as a stronger company.1