1 Source: Bloomberg, Morgan Stanley Wealth Management GIC, Private Equity Index Data: The Cambridge Associates Private Equity Index tracks the returns of a variety of private equity strategies, including buyout, control-oriented distressed, growth equity, energy, upstream energy and royalties, and venture capital. The data is updated quarterly using the Cambridge Associates Benchmark Calculator, with a lag of several months. Private equity returns are net to limited partners. Stocks are represented by the S&P 500 Total Return Index. Bonds are represented by Barclays US Aggregate. Alternatives Investment are composed of 16.6% Equity Hedge (HFRI Equity Hedge Index), 16.6% Equity Neutral (HFRI Equity Market Neutral Index), 33% Private Equity, and 33% Real Estate (National Council of Real Estate Investment Fiduciaries Property Index –NCREIF). Alternatives investments are not suitable for all investors. (Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.)
Definitions
For index, indicator and survey definitions referenced in this report please visit the following:
https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions
1940 Act Limitations
GIMA recognizes that both 1940 Act-registered open-end mutual funds that seek alternative-like exposure and traditional hedge funds seek investment returns that have lower correlation to traditional markets in an attempt to increase diversification in an overall portfolio.
Unlike traditional hedge funds, SEC registered open-end mutual funds that seek alternative-like exposure do not require investor pre-qualifications, enable efficient tax reporting, are subject to lower investment minimums and lower fees, provide portfolio transparency, daily liquidity, and are required to provide daily NAV pricing.
Because of 1940 Act limitations, mutual funds that seek alternative-like exposure generally must utilize a more limited investment universe and, therefore, will have relatively higher correlation with traditional market returns. Registered open-end funds are statutorily limited in their use of leverage, short sales and the use of derivative instruments.
Hedge funds typically charge an asset-based fee and a performance fee. Potential benefits to hedge funds include greater flexibility in terms of seeking enhanced returns through the use of leverage, exposure to less liquid investments, and the more flexible use of complex instruments such as derivatives.
As a result of these differences, performance for a mutual fund that seeks alternative-like exposure and its portfolio characteristics may vary from a traditional hedge fund that is seeking a similar investment objective.
Important Notice Regarding Complex Products – Please review
This fund utilizes non-traditional or complex investment strategies and/or derivatives. Examples of these types of funds include those that utilize one or more of the below noted investment strategies or categories or which seek exposure to the following markets:
· Commodities (e.g., agricultural, energy and metals), Currency, Precious Metals
· Managed Futures
· Leveraged, Inverse or Inverse Leveraged
· Bear Market, Hedging, Long-Short Equity, Market Neutral
· Real Estate
· Volatility (seeking exposure to the CBOE VIX Index)
Please refer to the fund’s prospectus for additional information and descriptions of the specific non-traditional and complex strategies utilized by the fund. Investors should carefully consider the fund’s investment objectives, detailed risk disclosures, charges and fees contained in the fund’s prospectus before investing. Please review the prospectus carefully and discuss any questions you may have with your Financial Advisor. You should also keep in mind that while mutual funds may at times utilize non-traditional investment options and strategies, they should not be equated with unregistered privately offered alternative investments. Because of regulatory limitations, mutual funds that seek alternative-like investment exposure must utilize a more limited investment universe. As a result, investment returns and portfolio characteristics of alternative mutual funds may vary from traditional hedge funds pursuing similar investment objectives. They are also more likely to have relatively higher correlation with traditional market returns than privately offered alternative investments. Moreover, traditional hedge funds have limited liquidity with long “lock-up” periods allowing them to pursue investment strategies without having to factor in the need to meet client redemptions. On the other hand, mutual funds typically must meet daily client redemptions. This differing liquidity profile can have a material impact on the investment returns generated by a mutual fund pursuing an alternative investing strategy compared with a traditional hedge fund pursuing the same strategy.
Non-traditional investment options and strategies are often employed by a portfolio manager to further a fund’s investment objective and to help offset market risks. However, these features may be complex, making it more difficult to understand the fund’s essential characteristics and risks, and how it will perform in different market environments and over various periods of time. They may also expose the fund to increased volatility and unanticipated risks particularly when used in complex combinations and/or accompanied by the use of borrowing or “leverage.”
Examples of non-traditional and complex investment options and strategies include the following. Please keep in mind that the below list is not exhaustive. Rather, it is a brief summary intended to focus your attention on some of the financial instruments, characteristics and special risk factors that may be associated with non-traditional mutual fund investments.
Asset Class and Other Risk Considerations
Investing in the markets entails the risk of market volatility. The value of all types of investments, including stocks, mutual funds, exchange-traded funds (“ETFs”), closed-end funds, and unit investment trusts, may increase or decrease over varying time periods.
Past performance is not a guarantee of future results.
Investing in stocks, mutual funds and exchange-traded funds (“ETFs”) entails the risks of market volatility. The value of all types of investments may increase or decrease over varying time periods. Besides the general risk of holding securities that may decline in value, closed-end funds may have additional risks related to declining market prices relative to net asset values (NAVs), active manager underperformance, and potential leverage. Some funds also invest in foreign securities, which may involve currency risk.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are appropriate only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before investing. Certain of these risks may include but are not limited to:
• Loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices;
• Lack of liquidity in that there may be no secondary market for a fund;
• Volatility of returns;
• Restrictions on transferring interests in a fund;
• Potential lack of diversification and resulting higher risk due to concentration of trading authority when a single advisor is utilized;
• Absence of information regarding valuations and pricing;
• Complex tax structures and delays in tax reporting;
• Less regulation and higher fees than mutual funds; and
• Risks associated with the operations, personnel, and processes of the manager.
Alternative/hedged strategies may use various investment strategies and techniques for both hedging and more speculative purposes such as short selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. Alternative/hedged strategies are not appropriate for all investors. A short sales strategy includes the risk of loss due to an increase in the market value of borrowed securities. Such a strategy may be combined with purchasing long positions in an attempt to improve portfolio performance. A short sales strategy may result in greater losses or lower positive returns than if the portfolio held only long positions, and the portfolio’s loss on a short sale is potentially unlimited. The use of leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company. A decrease in the credit quality of a highly leveraged company can lead to a significant decrease in the value of the company’s securities. In a liquidation or bankruptcy, a company’s creditors take precedence over the company’s stockholders.
Hedge funds may involve a high degree of risk, often engage in leveraging and…
Read More: Alternatives 2.0: Innovative Ways to Diversify Your Portfolio | Morgan Stanley