Investors have taken a shine to the plethora of ’40 Act funds offering alternative investment strategies that have launched since the financial crash five years ago.
But some people have questioned whether these funds pack the same performance potential as alternative investments found in private partnership structures, such as hedge funds, that don’t have restrictions placed on them by the Investment Company Act of 1940 regarding leverage, liquidity and diversification.
A recent study from Cliffwater LLC examined whether the so-called liquidity discount was truth or fiction. The result? On average, returns on liquid alternatives trail private alternatives by about 1 percent.
Alternative investment strategies aim to reduce portfolio volatility by providing low correlation to traditional stocks and bonds. Traditionally, they were the domain of institutions and accredited investors who accessed them through private partnerships with long lock-up periods, restricted redemption periods and hefty fees.
But the influx of alternative strategies available in more liquid––and less costly––investment vehicles has made it easier for retail investors to play the game.
Cliffwater, an alternative investments advisory services firm in Marina del Rey, Calif., based its study on monthly net-of-fee return data from 109 investment firms that manage both private and liquid offerings under the same general alternative strategy. The firm said it focused on the larger and more well-known firms among the roughly 400 investment firms it believes could’ve qualified for its study.
Those 109 participating firms provided a total of 148 private/liquid pairings that included five different liquid structures offering daily and/or weekly liquidity:
• Open-end ’40 Act mutual funds
• Separately managed accounts
• Undertakings for Collective Investment in Transferable Securities (UCITS), a European regulatory structure somewhat similar to U.S. ‘40 Act funds