Liquid alternatives come in different flavors, but for the most part they’re designed to provide a degree of noncorrelation to traditional stocks and bonds and, in the process, help dampen portfolio volatility and provide drawdown protection when markets go south.

The first-quarter coronavirus crisis should’ve been a time when they shined, and while some categories did better than others, it was mixed bag overall. And that probably didn’t do much to boost their appeal among financial advisors who have been slow to latch on to this product category, according to a new report from Cerulli Associates.

In its “The Cerulli Edge—U.S. Monthly Product Trends ” report, the research and consulting firm noted that allocations to hedge-fund-like liquid alternative products comprise only about 1% of advisor assets under management.

“Even though the products received increased attention after the 2007- 2008 global financial crisis, they sputtered in growth around 2014,” Cerulli noted in its report. It cited high fees, product complexity and performance issues as reasons why.

Indeed, liquid alts became a darling after the financial crisis, particularly when investors saw that the Altegris 40 managed-futures index gained more than 15% in 2008 versus the 37% plunge in the S&P 500 Index. To satisfy a growing demand for managed futures and other alternative strategies, the investment management industry commenced to roll out a steady stream of liquid-alt funds across different strategies that were aimed at retail investors, and there was a buzz of excitement surrounding this burgeoning corner of the investment world.

Citing data from Morningstar Direct, the Cerulli report shows that assets have declined in eight of the nine liquid-alts mutual fund categories since 2014. Asset declines can occur from investor outflows and underperformance, and they were particularly steep in the nontraditional bond, long-short equity and long-short credit categories.

Regarding performance in this year’s first quarter, the managed-futures mutual fund category returned 0.03% versus a 20% drop in the S&P 500 Index. In other words, this strategy came through in the clutch.

That said, mutual fund assets in this strategy slumped 18% between 2014 and this year’s first quarter, according to Cerulli. Part of the problem is that many investors focus on total performance numbers and fail to take into account this category isn’t meant to beat the return on the S&P 500 on a regular basis; rather, it’s meant to provide noncorrelation and downside protection (as well as some upside).

All told, the managed-futures mutual fund category registered a five-year average annual loss of 1.47% through this year’s first quarter. That won’t excite investors, but this category had a five-year correlation to equities of 0.13, which effectively decouples it from equity returns.

A correlation of 1.00 indicates perfect correlation between two different assets, while a correlation of zero means no correlation between them and a negative correlation indicates they tend to move in opposite directions.

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