The performance data on the seven categories of liquid alternative funds tracked by research firm Morningstar make that clear. All seven categories have dramatically underperformed the S&P 500 Index over the last six years, and most haven't done as well as bond indexes in most of those years, despite historically low interest rates. With the average cost of the alt funds several times more than the average actively managed equity fund, the poor performance is all the more striking.
"The liquid alternative funds are a disaster," Mallouk explained. "There is huge wealth being transferred to financial intermediaries in the alternatives space.
"Five years from now, people will be asking themselves why they paid so much to access those asset classes."
Like many financial advisors, Mallouk suggests that investors keep it simple if they want to diversify their portfolios further. Stocks and bonds in international and emerging markets are correlated with U.S. markets, but they provide some measure of diversification.