“Advisors have a tough job [with alt investments],” he adds. “It’s not just picking the right strategy, but also picking the right manager.”
It’s that last point that pops up repeatedly in industry discussions. For firms like Envestnet PMC, the process of manager selection is crucial. The firm, which provides portfolio advisory services, focuses on an “Alpha Thesis” when it comes to liquid alt funds.
“First, we want managers to clearly articulate the market inefficiency they are trying to exploit,” says Ken Shaw, Envestnet’s senior vice president. All liquid alt fund managers will tell you that their proprietary approach is superior to the peer group, but fund results don’t always back up that sentiment.
As a second test for these funds, Envestnet PMC looks at the size of the research team behind any liquid alt fund managers. Obviously, that approach is bound to favor the bigger firms that have access to the top fund managers and researchers.
In fact, with the entry of big firms such as Blackstone, Goldman Sachs, BlackRock and others making a big push into liquid alts, smaller firms with limited distribution reach are starting to feel the heat. That factor helps explain the recent rising tide of fund closures, according to Shaw.
Restieri notes that some firms may have underestimated the hedge-fund-to-mutual-fund transition. “You don’t necessarily need a big infrastructure to run a hedge fund, but mutual funds require a lot of layers of administration.” For liquid alt funds that haven’t amassed sufficient assets to manage, an eventual closure may be inevitable.
Meanwhile, firms that have had previous success in hedge fund management, such as Millburn Corp. or Informed Portfolio Management (IPM), are increasingly partnering with traditional retail fund management firms to launch liquid alt mutual funds. “The big hedge funds have learned that it’s hard to make the transition to mutual funds on their own,” says Andrew Rogers, CEO of Gemini Funds Services, a full-service fund administrator providing compliance, distribution and risk reporting services.
High Fees? Low Fees? Yes
The other industry challenge involves fee structures, which tend to be much lower than those of hedge funds but higher than those of traditional mutual funds. And in light of the market share that stock and bond ETFs have taken from their mutual fund counterparts, it’s fair to ask if a similar trend will play out among liquid alts.
Indeed, a number of the bigger firms such as Goldman Sachs and Blackstone are moving to cover both bases. “Certain alt approaches will lend themselves to passive management, while others will still require an active hand,” says Restieri. Goldman has been rolling out new liquid alt mutual funds and ETFs simultaneously.