The Trustee and the Prudent Investor: The Emerging Acceptance of Alternative Investments as the New Fiduciary Standard

41 Pages Posted: 29 Nov 2012

See all articles by Philip J. Ruce

Philip J. Ruce

Thomas Jefferson School of Law

Date Written: 2012

Abstract

Under the Restatement (Third) of Trusts, the prudent investor rule states that “The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.” Trust investments must be made with the beneficiaries in mind, and the management of the trust assets must be kept to a prudent standard.

This means that trustees can invest in virtually anything, as long as it can be shown to be prudent under the circumstances, and in light of the portfolio as a whole. But recently a new trend has emerged in what is now considered to be a prudent investment for trusts — alternative investments classes. Alternative investments are investments “other than traditional investments in fixed income and publicly traded equity securities.” But as a recently new development, the long-term benefits of these investments in personal trusts remain largely untested. The question is, to what extend are alternative investments part of the prudent investor’s portfolio, and should they bear a permanent, and even mandatory, place in trust and fiduciary investing?

This paper details the history of a trustee’s accepted investment practice, and uses that history as a backdrop for the analysis of modern-day investment decisions by investment managers. Special attention is paid to the development of modern portfolio theory and efficient market theory, as both are key to the development of the prudent investor rule, and key to an investment manager’s decision in selecting appropriate investments for trust assets, including alternative investments. The paper concludes that alternative investments will be accepted as a standard bearer for trust investments; these investments will stop being viewed as “alternative” and indeed will become mainstream and necessary. And for good reason ... particularly in light of the volatility experiences by lay and professional investors alike over the past decade, hedges and non-correlated investment strategies are a necessary part of the fiduciary portfolio.

Keywords: trust, trustee, investments, fiduciary, alternative, modern portfolio, Hedge, investment, efficient capital, prudent

JEL Classification: A11, A12, B20, K10, K11, K30, G21

Suggested Citation

Ruce, Philip J., The Trustee and the Prudent Investor: The Emerging Acceptance of Alternative Investments as the New Fiduciary Standard (2012). South Texas Law Review, Vol. 53, No. 4, 2012, Available at SSRN: https://ssrn.com/abstract=2181990

Philip J. Ruce (Contact Author)

Thomas Jefferson School of Law ( email )

701 B Street
Suite 110
San Diego, CA 92101
United States

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