Altegris’s Osborne concurs, noting that “there is a continuing move towards lower fee solutions.” He is seeing an emergence of quantitative strategies that focus on factors such as carry trades or value-versus-growth algorithms. Those funds can utilize smaller portfolio management teams and can pass on the savings as a result.
Baby Boomers To The Rescue
Perhaps the single greatest factor in favor of liquid alts is demographics. Roughly 10,000 baby boomers turn 65 every day, and that trend will stay intact for the next 14 years.
These investors are a natural fit for liquid alts’ capital preservation approach. For any investors that hoped to retire near the end of the last decade, the sharp market drops in 2008 and 2009 led to a painful readjustment in the timing of retirement. Soon-to-be retirees today are surely cognizant of that period.
In a recent white paper entitled “Liquid Alternatives: The Next Wave in Asset Allocation,” the alternative asset management team at Lazard Asset Management noted that liquid alternative strategies offer “a potential buffer to equity market downturns.” They think baby boomers will need “assets with characteristics such as lower volatility return streams, some measure of capital preservation during negative market environments, and diversification.” The key takeaway: “Liquid alternative funds will be a solution that is increasingly part of the asset allocation decisions for millions of Americans.”
Cream Rising To The Top
With so many new funds hitting the market in recent years, performance is starting to become the primary selling point, especially in lagging sub-categories. In the long/short category, the average fund has lost an average of 5.7% (through March 22, 2016). Yet some managers, like Harin de Silva, president of Analytic Investors, have started to build a strong following.
De Silva’s firm sub-advises the 361 Global Long/Short Equity Fund (AGAQX), which has delivered a 7.8% return over the past year. The approach is quite transparent. For every $100 invested on the long side in low-beta and low-volatility stocks, another $30 is used to short high-beta stocks.
De Silva thinks that long-only strategies can only benefit from a rising market. “But in a long/short strategy, you need a much defter hand,” he says. The recent market backdrop has been favorable for him and his team. “The choppier the market, the better for us.”
But the dispersion of returns among long-short funds has been all over the place. Successful short sellers “combine macro insight, thematic analysis, and fundamental stock selection with specialized risk-management techniques,” says Rick Lake, co-chairman of Lake Partners.