Profitable shorts in recent market downdrafts capitalized on evolving market dynamics, according to Lake. “Last summer, investors grew increasingly discriminating in stock selection. This created multiple short opportunities—weak companies that were no longer being lifted by a rising market, former ‘hype’ and ‘hope’ stocks that were unable to meet unrealistic expectations, and companies that were leveraged to a downturn in energy and commodities.”
Investors can also choose from a variety of other funds that have generally delivered category-beating returns and high marks from Morningstar. The AQR Managed Futures Strategy Fund (AQMIX), which gets a five-star rating from Morningstar, has scored in the top 10% of all managed futures funds on a three- and five-year basis. The 1.23% expense ratio is also below the industry average. The fund takes a complex but thus far successful approach to price movements in various asset classes. Its managers invest in futures contracts covering four asset classes (stocks, bonds, commodities and currencies) and alters various weightings in response to short-term and long-term technical trends.
John Hancock’s institutional arm has posted impressive results working with a number of sub-advisors. In 2014, the Boston Partners Long/Short Equity fund was named Morningstar manager of the year in the alternatives category, and in 2015, the John Hancock Global Absolute Return Strategies fund and Boston Partners Long/Short research fund were both runners up.
The BlackRock Multi-Asset Income Portfolio Investor C Shares (BCICX) fund has been a top performer in the multi-asset category. The fund, which invests in stocks, bonds and a range of alternative investments, has a dual focus on capital preservation and income generation. The fund, which merits a “Bronze” rating from Morningstar, benefits from the broad set of research resources that BlackRock Investments can offer to the fund management team.
Perhaps the greatest measures of performance and value for liquid alt funds can be found in their Sharpe ratios (for risk-adjusted returns) and fund expenses. By those measures, the Vanguard Market Neutral Fund Institutional Shares (VMNIX) fares quite well. The fund’s 0.95 Sharpe ratio is tops in its category, according to Morningstar, while the 0.15% expense ratio (it’s 0.25% for retail investors) is almost unheard of in the liquid alt space.
A Transitional Year
In many respects, 2016 is shaping up to be a transitional year for the liquid alts industry. The frenzied pace of asset inflows after the Great Recession of 2008 and 2009 has come to an end, replaced by a rotation away from some approaches that have lost popularity (such as non-traditional bond funds) and toward approaches that are seen as more relevant for today’s markets (such as managed futures funds).
The industry is also welcoming the increased attention of traditional asset management firms such as Blackstone and Goldman Sachs, along with retail investing giant Vanguard. And thanks to enhanced educational efforts industrywide, investors are slowly moving up the learning curve with these funds. Despite some recent industry growing pains, the asset category, and the funds that back them, should garner greater acceptance in the years ahead.