While many of the first established hedge funds date back to the 1970s, liquid alternatives are a fairly new asset class. Many of these strategies seek to provide hedge fund like returns in a mutual fund format. These funds have recently been put to the test during the recent market correction. A recent article from Investment News magazine entitled “Liquid Alts funds pass first real test with flying colors” highlights the relative out-performance of this asset class versus traditional markets in the recent market sell off. Highlighted in their analysis is the AQR Managed Futures fund which is one of four managers we have allocated in to this space. The fund gained 4.15% on Monday (8/24/15) when the equity markets (as measured by the S&P 500 index) dropped 3.94%. Even the worst liquid alternative category, Equity Long-Short (as tracked by Morningstar Inc.), only dropped 1.86% on average during trading on Monday.
“Winning by losing less is a theme that the liquid alts space has long embraced, but over the past six years, most of the strategies haven’t been able to prove the point. Until now” -Investment News
We have been investing in liquid alternatives for the past few years in our portfolios. We have seen many new products brought to the investment marketplace. We believe that a few of these products make for attractive components to our client portfolios, but there are also many products that we do not feel are appropriate in that format. Certain hedge fund strategies (managed futures and hedged equity) are liquid and transparent enough for a mutual fund investment, while other strategies (private equity, private real estate, and venture capital) are not. We continue to focus our efforts on managers that can manage volatility and provide relatively attractive returns that are less correlated to traditional markets. We believe that more and more products will be introduced to the marketplace and we are excited for the opportunities that this may provide for our client portfolios.