I agree with much that joewolf wrote about ALF. Another...

I agree with much that joewolf wrote about ALF. Another perspective is that we mostly hold long only funds or shares directly. Thus ALF can provide diversification for a portfolio. ALF depends on stock picking ability not the general rise and fall of the market.

In a rising market we might just as well be long only. I do not see ALF providing much useful diversification and it may underperform given shorts and the possibility of poor stock selection. In a sidewise fluctuating market our other holdings will do little and whether ALF outperforms or not is also uncertain. It could go either way depending on stock selection.

However in a falling market our long only positions will drop (by how much depends on our stock selection), but ALF because it has short and long positions at least has the potential to have positive returns assuming it does not stuff up stock selection. I would generally try to increase cash holdings if I am worried about a market fall, but this only protects some capital and will not produce positive capital returns. ALF seems to provide a way of potentially giving positive returns even in a falling market.

It seems to me you should look at ALF in the context of your general portfolio and not in isolation. It can provide diversification and can potentially do best when the rest of your portfolio is declining. As we can never be sure what the general market will do in future I am happy to hold some ALF as a small part of a larger portfolio.