Investing Like the Pros: Combining Index Funds with Alternative Strategies

By: Jonathan Clements, Wall Street Journal
Published: February 8, 2006


If you’re like many mutual-fund investors, you own a mix of actively managed stock funds that tap into a host of market sectors. And, of course, you hope to beat the market.

“Problem is, a lot of what you’re paying for isn’t stock-picking skill but basic market exposure and you could get that a whole lot cheaper by buying market-tracking index funds.

Institutional investors have woken up to this fact. It explains their enthusiasm for not only prosaic index funds but also exotic investments like hedge funds

Over the past decade, pension funds have favored the two extremes, buying both humdrum index funds and alternatives like private equity, venture capital, real estate and hedge funds.

True, hedge funds and their ilk often charge outrageous expenses. Still, if you index 80 percent of your stock portfolio and stash 20 percent in exotic alpha investments, your total costs should be far lower than if you had bought a conventional portfolio of actively managed funds.

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