Yet other strategies appear better suited to the liquid alt wrapper. Managed futures funds, for example, have built solid long-term track records going back to 2000, according to research conducted by Altegris. Such funds are once again racking up respectable recent returns, now that volatility has returned to the market, says Osborne. He adds that trend-following, especially in fixed income and energy, has been a very fruitful strategy in 2016.
Rebuilding The Image
In the face of tepid multiyear returns for many liquid alt funds, the heavy inflow into the funds has slowed to a trickle. According to Morningstar, industry fund inflows peaked at $97 billion in 2013 and slipped to $37 billion in 2014. In 2015, roughly $6 billion in assets flowed out of these funds, a trend that continued in the early months of 2016.
To be fair, traditional stock and bond funds saw much greater outflows in 2015. Yet that exodus from the traditional “60/40” (stock-bond) approach is not tangibly boosting the flows for liquid alts, as was the case in 2008 and 2009.
Larry Restieri, head of alternative sales for global third-party distribution at Goldman Sachs Asset Management, thinks that liquid alts are faring better than some may realize. “While the performance was underwhelming on an absolute basis in 2015, they did what they are supposed to do,” he says.
Restieri notes that these funds are built to correlate with their hedge fund counterparts, and relative to equities, they are clearly reducing portfolio volatility. A study conducted by Goldman found that liquid alternatives outperformed their traditional, non-traded counterparts in 2015.
A Maturing Phase
Despite the recent spate of fund closures, few think that the niche has already peaked. “What’s taking place is the natural sorting out of a segment of the mutual fund industry that experienced rapid growth and has become to a certain degree oversaturated,” noted Morningstar’s Josh Charlson in a recent report.
Yet for investor interest in these products to keep building, it’s increasingly clear that the industry “needs to raise the bar concerning the knowledge of these products,” says William Kelly, CEO of the Chartered Alternative Investment Analyst Association (CAIA).
In 2014, the association launched a 21-hour online course that provides a comprehensive alternative investment education curriculum. As advisors become better educated on the various aspects of alt investing, they also become better positioned to explain such strategies to their clients. “These investments have tangible portfolio benefits that may not be readily understood by the average client,” Kelly says.