Growth of Liquid Alternatives

Growth of Liquid Alternatives

The proliferation of liquid alternative strategies is causing many advisors to take so much time away from servicing their clients that it has become a distraction.  As the saying goes, you’ll spend 90% of your time looking at alternatives, and it will make up just 10% of your portfolio.

There was nearly $162 billion in assets in 429 alternative mutual funds at the end of February 2014, up from nearly 40% in assets in 383 funds a year before, according to Morningstar. The products offer access to hedge-fund style portfolio management strategies, often engineered to limit volatility or investment risk factors while delivering competitive returns.In 2013 alone net inflows into the category were an astonishing $40 billion.

To help wade through the maze of liquid alternatives, advisors would be better served to examine why they are incorporating alternatives in the first place.  Is it as a risk-mitigator?  Is it as a return enhancer? Or, can it be both?  With this foundational understanding, advisors can be better prepared to incorporate liquid alternatives and to build scale around how they implement to take back control, and to re-allocate their time back to serving clients.

We use the following matrix when we allocate to our Hedge Fund Model:

• ARBITRAGE
  1. Fixed Income Arbitrage
  2. Convertible Bond Arbitrage
  3. Statistical Arbitrage
  4. Capital Structure Arbitrage
• EVENT DRIVEN
  1. Risk Arbitrage
  2. Special Situations
  3. Activist Investing
  4. Hedged Distressed Debt
• DIRECTIONAL
  1. Equity Long/Short
  2. Credit Long/Short
  3. Managed Futures
  4. Tactical