Alternative Mutual Funds Rake in Money Amid Market Turmoil

Even funds that can be used to fight inflation fell out of favor last month, including inflation-protected bonds, bank loans, and commodities.

Illustration by II

Illustration by II

The flow data in September wasn’t pretty for managers overseeing stock and bond funds. But for those managing alternative and nontraditional strategies, the money kept coming in from investors seeking a refuge from dismal markets.

Mutual funds, including exchange-traded funds, had outflows of $77 billion last month, a sharp reversal from August’s modest inflows of $4.8 billion, according to the latest fund flows report from Morningstar. Taxable bond, municipal bond, and stock funds focused on specific sectors were among the categories that saw the most outflows in September. Some of the nation’s largest asset managers were also hit hard, including Capital Group’s American Funds, T. Rowe Price, and Invesco. The Vanguard Group and Fidelity Investments saw outflows of $3.2 billion and $3.6 billion, respectively, last month. Vanguard has had only four losing months, including September, in a decade, according to Morningstar.

Even funds that can be used to fight inflation fell out of favor in September. Inflation-protected bonds, bank loans, and commodities shed more than $3 billion in assets in the third quarter, according to the report.

Alternative and nontraditional stock funds, however, managed to keep their recent streak of inflows alive. Alternative funds and nontraditional-equity funds recorded inflows of $1.1 billion and $1.4 billion in September, respectively. Although the two categories experienced the weakest inflows in over a year, they were still among the few that didn’t lose assets last month.

The organic growth rate was particularly strong for nontraditional-equity funds, which stood at more than 2 percent last month and an astonishing 63 percent in the trailing 12 months ending in September.


According to the Morningstar report, alternative funds and nontraditional-equity funds have seen inflows every month since May 2020 and January 2021, respectively. The continuing inflows come at a time when stocks and bonds both tumbled amid persistent inflation, rising interest rates, and mounting fears of a recession. The S&P 500 has lost 25 percent year-to-date through September. The S&P 500 Bond Index, which is the corporate-bond counterpart to the S&P 500, has also dropped 17.5 percent.

The disheartening performance of both asset classes adds to evidence that investors can no longer rely on traditional 60-40 portfolios. Fund flows last month reflected the larger change. According to an AQR paper in December 2021, investors should seek additional sources of diversification from funds specializing in risk parity, long-short equity, and multi-asset alternative risk premia strategies in the current market downturn.