Aaron Izenstark, co-founder and chief investment officer of Iron Financial LLC, a Northbrook, Ill.-based firm that focuses on liquid alts and manages about $2.5 billion in assets, encourages advisors to look under the hood to see what managers are trying to achieve.
Unconstrained bond or nontraditional bond really doesn’t tell you much, he says.
For its part, the Iron Strategic Income Fund hedges interest rate risk with futures and hedges credit risk with credit default swaps. It also goes long and short on ETFs and yield curve opportunities when it sees relative value.
Izenstark says it’s important to check how a strategy managed through a rough period and even how a strategy reacted to overnight catastrophic news. For example, if one claims it can protect against rising interest rates, see how it performed during the second quarter of 2013. “During these crazy market times is when you really need an alternative,” he says.
More than ever, “Advisors are waking up to try to find things that make a statistical difference to their portfolios,” he says. Those he works with generally allocate 10% to 30% to liquid alts. Typically, below 10% doesn’t make much of a difference, he adds.
Brian Haskin, founder, CEO and chief investment officer of Alternative Strategy Partners LLC, a Los Angeles-based investment-consulting firm, says his clients—advisors, family offices and high-net-worth and institutional investors—seek to reduce portfolio volatility. Many are also tapped out on traditional fixed-income products and looking for new ways to capture some additional yield, especially if interest rates rise, he says.
He expects opportunities in long-short equity, managed futures and event-driven strategies. The past five years have been rough for most managed futures, but he thinks lessening intervention by the Federal Reserve and dislocation among central banks’ policies will help them serve as diversifiers in portfolios. Event-driven strategies should do well as merger and acquisition activity continues to pick up, he says.
Reality Check
Larry Restieri, head of alternative sales for global third-party distribution at Goldman Sachs Asset Management (GSAM), which has been building out its liquid alt offerings and focusing on related education, encourages advisors to set realistic expectations.
If clients are concerned their alternatives aren’t keeping pace with the rise in equities, he says, explain that’s not what they’re designed to do and show them how they can help smooth out a portfolio.
Advisors and investors can access information and an alternative investment allocation tool in the liquid alternatives center on GSAM’s public website. According to data cited by Goldman Sachs, retail investors allocate less than 5% to alternative investments, compared with nearly 25% for institutional investors. Individual client allocations should be based on their liquidity needs, long-term goals and time to retirement, says Restieri.
As of September 30, GSAM had $113 billion in alternative investments, including $4.1 billion in seven liquid alternative funds. Its offerings include its Absolute Return Tracker Fund (GARTX/GJRTX), Multi-Manager Alternatives Fund (GMAMX/GSMMX) and single-strategy funds. Advisors building their own portfolios should make sure they are diversified, he says.
Restieri expects continued broad adoption of liquid alts and an expanded range of implementation options. “We’re big believers in this category of funds,” he says. “We think they’re here to stay.”