Jitters over the outlook for the bond market contributed to an uptick in the amount of money flowing into alternative mutual funds—more than $40 billion in 2013. Big winners in the move were nontraditional bond funds, which have wide discretion to invest in a multitude of fixed-income securities (also referred to as unconstrained bond funds).
That's a good example of what can be one of the worst mistakes investors make: panicking when times get tough and abandoning their asset allocation plans. Bond investors did just that at the prospect of rising interest rates. When rates rise, bond prices fall and vice versa. More than a quarter of the 301 advisors who participated in a recent Morningstar survey cited a poor bond market outlook as a key reason to invest in alternatives.
The 2013 flood into alternatives did halve itself this year: Through the end of November, roughly $19 billion had flowed into alternative mutual funds, according to Morningstar. But it's a mutual fund asset class that now has a total of $162 billion in assets from mom-and-pop investors. Whether it's the bond market fears or equities, many investors and financial advisors have latched on to alternatives in recent years.