Liquid Alternative Investment Strategies

Part 1: An introduction to Liquid Alternative Strategies and the forces behind their growth

Alternative assets are an important component of an institutional investment portfolio as they can add true diversification to portfolios and reduce reliance on long positions in stocks, bonds and cash for total return.

The recent growth of liquid alternative investments and strategies is a top-of-mind subject that has investment committees inquiring about their effectiveness, investment management firms scrambling to create new products, and media sensationalizing the idea as new and innovative. New? Not really, because REITS were created in 1960 when President Eisenhower signed the REIT Act title contained in the Cigar Excise Tax extension into law. Innovative? Maybe, because alternative investment strategies that previously were available only to large institutions and accredited investors are now accessible to smaller institutions and individuals.

Liquid alternative funds offer asset managers another avenue for growth at a time when competition among firms is increasing dramatically.

These funds often are confused with general multi-asset funds, which frequently fail to meet the investor’s risk or return objectives. The definition of a liquid alternative fund is perplexing and unclear with no strong consensus forming among institutional investors, asset managers and consultants. Recent articles highlighting liquid alternatives generally refer to liquid hedge fund strategies, often neglecting real assets and other important alternative assets and strategies. In 2006, Morningstar broadly defined liquid alternatives as any fund that “hedges” risk or attempts to generate absolute return. Since then, the assortment of liquid alternative funds has expanded at an accelerated pace, making a clear definition challenging.

Growth of Liquid Alternatives

Source: Morningstar

The growth of liquid alternative strategies has been impressive. Through mid-2014, Morningstar estimates the number of liquid alternative investment funds operating globally at approximately 455, more than double the amount, 217, at the end of 2008. Additionally, assets in these funds have more than quadrupled from $38 billion to $154 billion during the same time frame. Morningstar breaks down alternatives mutual funds into 14 categories with the largest categories being multi-alternative, long/short equity, managed futures, non-traditional bond, market-neutral and bear market.

Breakdown in Liquid Alternative Strategies

Source: Morningstar, June 2014


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