While it can’t seem to get its municipal bond index fund off the launch pad, Vanguard did make good on its plans to offer an Alternative Strategies fund, launching it Thursday evening.
Alternative Strategies has the option of using long-short strategies, event-driven strategies, strategies to capture mispricing in the bond markets, and commodity contracts and currencies. Fund manager Michael Roach, a member of Vanguard’s quant team, is expected to use leverage to amplify the investments in the fund.
But before you get all hot about Vanguard’s entry into an area it has often critiqued as inappropriate for most individual investors, recognize that (a) the fund has a $250,000 minimum, which means it will be out of range for most individual investors; and (b) it’s being launched primarily for use by the Vanguard Managed Payout Fund (MUTF:VPGDX), which used to invest in commodities through a special internal fund, but recently has used the PowerShares DB Commodity Index Tracking Fund (NYSEARCA:DBC), and long-short strategies through the Vanguard Market Neutral Fund (MUTF:VMNFX).
We would expect that Vanguard will eventually remove the Market Neutral allocation from Managed Payout. As of April 31, Managed Payout’s 10.1% allocation to it represents $162 million, or a little less than half the $377 million in assets invested in Market Neutral.
It wouldn’t surprise us in the least to see Vanguard shutter that fund down the road. Expenses for Alternative Strategies run 1.1%, which is lower than the current 1.64% expense ratio on Market Neutral.
Replacing the 10.1% allocation to Market Neutral as well as the 5.3% allocation that Managed Payout currently has to commodities could mean that Alternative Strategies could very quickly blossom to more than $250 million in assets. Whether other investors will find much interest in the fund, and whether Vanguard will offer it in smaller quantities to clients of its Personal Advisor service remain a question.
Ticker symbol on the fund is VASFX. Distributions will be made annually.
Editor Dan Wiener and Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, an award-winning monthly advisory letter that keeps subscribers abreast of recent developments at Vanguard, and provides long-term guidance for investing in the Vanguard fund family.
