Liquid alts can enhance long-term portfolio returns and reduce risk, finds Aite Group in its new study
Boston, Nov 20th, 2014 - In its latest report, Liquid Alternative Investments: The Real McCoy or Just a Passing Fancy?, Aite Group assesses liquid alternative investments (liquid alts), comprising exchange-listed, publicly traded mutual funds or exchange-traded products (ETPs). These are primarily engaged in alternative investment strategies, such as long/short equity and managed futures, via both traditional and alternative asset classes.
The 2008 global financial crisis marked a turning point for investors, with transformational forces necessitating a fresh approach to asset allocation within the context of enhancing returns and reducing risks. Since then, the availability of liquid alternative investments has grown by leaps and bounds.
Aite Group found that the liquid alternatives investments industry, while not a passing fancy, isn't growing evenly across both the ’40 Act mutual funds and exchange-traded products alike, and its growth pace is beginning to slow down, especially in 2014. Yet alternative mutual funds have more than doubled total assets under management (AUM) from roughly US$102 billion at the beginning of 2011 to US$314 billion as of Q3 2014. Investment in liquid alternative mutual funds over this period primarily went into nontraditional bond, equity long/short, and multi-alternative strategies
Research shows that alternative investment strategies do have a legitimate role to play in portfolio diversification and the overall investments risk reduction process, right alongside traditional, long-only investment products. The democratization process of hedge fund-like products getting introduced to the mainstream investing public via liquid alt mutual funds and ETPs is, therefore, a good thing, says Aite Group. More competition in this space will lead to further reduction in management fees/expense ratios, and, accompanied by better risk management techniques, will only benefit all investors.
To truly reinvigorate this business and to ensure future growth, the manufacturers of these often misunderstood liquid alt products must reach out to the general investing public and their financial advisors and offer in-depth and genuine education efforts.
"Adding a liquid alternative allocation to a traditional portfolio has the potential to enhance long-term portfolio returns and reduce risk, and it may lower sensitivity to overall market volatility and interest-rate fluctuations," says Howard Tai, senior analyst in Institutional Securities & Investments at Aite Group. "Strong risk management discipline must be carried out, though, to incorporate liquid alt products into portfolios holdings both tactically and strategically and depending on one’s risk tolerance and investment time horizon. Yet it is still safe to assume we will see continued growth of liquid alternative investments for some time to come."