Alternative Assets for the Masses

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Individual investors who want in can consider a number of private equity firms that trade publicly, including Blackstone Group (BX) and Onex (ONEXF). But because single-stock bets are risky—Blackstone is down 56% since its June 2007 IPO—investors looking for exposure should probably stick to funds that track listed private equity firms. An ETF from PowerShares, the Global Listed Private Equity Portfolio (PSP), as of Dec. 14 had returned 30% in 2009. Vista Listed Private Equity Plus (LPEAX), an active mutual fund, was up 42%. Steven R. Samson, president of Vista Research & Management in Greenwich, Conn., attributes the fund's outperformance to its go-anywhere style. "We're constantly scouring the globe for new listings." Broad geographic, industry, and market cap diversification, he says, is a must. But so is buying at the right time. Management began adding Blackstone to the portfolio in early 2009, when shares were trading below 5. Now, at 14, "it's one of the top holdings," says Samson.

Darek Wojnar, head of product strategy and research at iShares, thinks the business of alternative assets is "in its adolescence." As retail products proliferate, the asset class will become more user-friendly compared with the hedge funds of old, he says: "Why would investors want to invest in vehicles that are expensive, have no transparency, have significant liquidity restrictions, and do not disclose exposure?"

Already, JPMorgan (JPM), and Schwab (SCH) are among the big shops offering retail funds. Exchange-traded funds have also popped up, such as iShares Diversified Alternatives Trust (ALT), which has an expense ratio, or the annual cost to investors expressed as a percentage of the total amount they have invested, of 0.95%. A newer player in the fund field, IndexIQ in Rye Brook, N.Y., offers two ETFs that use hedge fund strategies, both priced at 0.75%. But don't be persuaded by the low fees alone. Lo warns that some ETFs use short positions and are "potentially misleading," because they offer short exposure on a daily basis rather than over a period of time. Check with a financial adviser or fund ratings service before buying.

Kalwarski is Numbers department editor at BusinessWeek.

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