Vanguard Plan To Launch Alt Fund Raises Eyebrows

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Vanguard Group, a low-cost mutual fund industry behemoth, intends to launch a new multi-alternative mutual fund called the Vanguard Alternative Strategies Fund, kicking off a passionate debate whether it’s straying too far from its passive principles.

The indexing advocate filed a Form N-1A on February 27th with the Securities and Exchange Commission signaling its entry into the actively managed space.

Alt Fund to invest in range of alternatives

Vanguard Alternative Strategies Fund will be actively managed and will invest in a range of alternative strategies using long and short positions in equities, forward foreign currency contracts, commodity and Treasury futures, swaps and other investments. Alluding to its low-cost principles, the estimated 1.10% expense ratio on the fund’s investor shares is below the alternative fund category’s 1.9% average expense ratio, according to Morningstar. However, the management fee is not specified.

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Daniel Wiener, editor of a newsletter for Vanguard investors, indicated that the new fund’s $250,000 minimum would put it out of the range of most individuals, and that it will be used primarily by Vanguard’s Managed Payout Fund (VPGDX).

The long-established king of low-cost indexing behemoth indicated that its Alternative Strategies Fund will receive an allocation of approximately 10% within its Managed Payout Fund, and the holdings of its various underlying funds will be rebalanced proportionately. As a result, Vanguard anticipates that the Managed Payout Fund’s expense ratio will increase to 0.42% from 0.34%.

For the time being, access to the new fund will be limited to institutional investors, through Vanguard’s Institutional Advisory Services Group or through the $1.6 billion Vanguard Managed Payout Fund

A spokesman for Vanguard said the new fund is meant to meet the needs of an expanding client base and the firm doesn’t want to make it available to the typical mom-and-pop retail investor. Reiterating the firm’s long-established strategy, he clarified that: “We continue to advocate for broad-based index funds and diversified all-in-one funds for individual investors and defined-contribution plan participants”.

Is Vanguard straying from its passive principles?

Reacting to Vanguard’s latest move, critics pointed to the firm’s long-held principles, formed decades ago by founder Jack Bogle, that investors should eschew high fees and active management in favor of well-constructed index funds.

Industry observers point out that Vanguard’s interest in liquid alts actually goes back to its 2007 acquisition of a Charles Schwab market neutral fund, which was sub-advised by outside managers until brought in house in 2011.

Interestingly, in August 2014, Vanguard published a whitepaper titled: “Liquid Alternatives: A Better Mousetrap?” wherein it was skeptical of liquid alts. The paper’s authors wrote: “We caution ‘buyer beware’ when contemplating the allure of the exotic”.

As reported by ValueWalk, Vanguard announced its intention to offer its maiden passive muni-bond exchange-traded fund focused on the $3.6 trillion U.S. municipal bond market in January.

Jack Bogle, a staunch advocate of index investing, at first criticized Vanguard’s entry into the exchange-traded fund business, labeling the funds speculative, though he later softened that stance.