Does your liquid alternative fund live up to its name?

Does your liquid alternative fund live up to its name?

03-10-2016 | インサイト

Liquid alternatives are receiving more attention from investors in the current landscape of low yields, lower expected returns and fewer diversification opportunities. But do all liquid alternative funds deserve the label ‘liquid alternative’? Many do not, and it is time to separate the wheat from the chaff, say quantitative researchers Alexander de Roode and Thijs Markwat.

  • Alexander de Roode
    Alexander
    de Roode
    Quantitative Researcher
  • Thijs Markwat
    Thijs
    Markwat
    Portfolio strategist

Speed read

  • True liquid alternatives deliver diversification by exposure to alternative risk premia
  • The impact of liquid alternatives styles on the investor’s portfolio can be quite different
  • Liquid alternatives can create more balanced investment portfolios

Liquid alternatives are designed to answer the need for alternative sources of return and diversification. This new type of investment vehicles can broadly be described as hedge funds in a mutual fund framework. Liquid alternatives are gaining more attention from investors as a replacement for hedge funds, but remain relatively unknown. Given the current market environment, investors are intensifying their search for alternatives that can deliver return and true diversification in their portfolios.

Therefore, interest in the alternative universe is increasing, leading to questions about the potential benefit of such allocations. In particular, investors are questioning how liquid alternatives compare to the broad alternative investment universe. De Roode and Markwat searched for answers and wrote a white paper, ‘Defining liquid alternatives’. They evaluate liquid alternatives, define their key characteristics, and present criteria for investors to evaluate them in portfolios. Here, there are answers to some of the questions surrounding this concept.

Your white paper suggests that some fund managers have gone too far in their use of the label ‘liquid alternatives’. So do these funds not live up to their name?

Markwat: “We see many funds that label themselves as liquid alternatives. Some of them are somewhat misleading. They do not offer exposure to true alternative risk premia but instead offer traditional risk premia. This has created tension between those offering true liquid alternatives strategies and those funds who want to ride the wave but do not necessarily diversify investor’s portfolios.”

Is that why you begin with a definition of what liquid alternatives actually are?

De Roode: “Yes. In the alternative investment universe, we distinguish between alternative strategies and alternative asset classes. In our definition, alternative strategies deliver diversification to a portfolio through exposure to alternative risk premia. Alternative asset classes, on the other hand, solely give an investor static exposure to non-traditional assets.”

“If an alternative investment fund loads substantially on traditional risk premia, then this strategy does not fit the definition of ‘alternative’. True liquid alternatives deliver diversification by exposure to alternative risk premia, whereas others show larger correlations with traditional risk premia and do not diversify.”

“Most funds in these alternative strategies category apply very broad investment strategies such as global macro, equity market neutral or managed futures. Conversely, alternative strategies can also consist of those that are only applied to the traditional asset classes of equities and bonds. In that case, the ‘alternative’ character solely comes from the strategy, and not from the underlying investments in alternative asset classes. An alternative strategy should capture another source of return than traditional market exposures.

‘Transparency is a key characteristic of liquid alternatives’

How can investors separate the chaff from the wheat?

De Roode: “We identify three important criteria for liquid alternatives. The underlying strategies must give exposure to alternative risk premia; they should be liquid, and they should be transparent. Exposure to alternative risk premia can only be obtained through investment strategies. To evaluate whether a liquid alternative can be considered as such, the underlying investment strategy needs to be analyzed.”

“Transparency is an important characteristic. We believe transparency is a key feature in the evaluation of whether funds can be defined as liquid alternatives. Transparency allows investors to analyze whether the exposures of the investment strategies fit into their portfolio. Transparency also helps investors to determine the optimal allocation in their portfolio.”

“A third characteristic of ‘liquid alternative’ is of course liquidity. Alternative strategies can provide access to illiquid assets such as direct real estate, infrastructure and private equity. These strategies cannot be implemented by any investor due to their strong constraints. As such we do not regard such investments liquid alternatives.”

What do you advise investors who are considering investing in liquid alternatives?

Markwat: “To begin with, investors need to analyze their portfolio. This analysis can reveal that they have a limited exposure to alternative risk premia, whereas a more diversified portfolio requires a broader scope than only targeting traditional risk premia. Exposure to alternative risk premia can be found in liquid or illiquid alternative investments.”

“Investors have to decide if they can tolerate illiquid investments in their portfolio, or if they are dependent on liquid alternatives. Factors such risk appetite, liabilities, investment beliefs and investment goals play an important role in this decision. Due to internal constraints, not every investor can have an exposure to illiquid investments. As an alternative to these investments, investors can turn to liquid alternatives.

“The return characteristics between alternative liquid strategies, and even within one category of strategies, can be quite large. With the large dispersion in the liquid alternative universe, the impact on the investor’s portfolio can be quite different. Therefore, manager selection is key.”

And last but not least, we ask investors: do you fully understand the alternative strategy, and can you fully support the investment in good and bad times? You need to do your homework and seek advice when necessary, as liquid alternatives consist of very different strategies, and are often hard to understand. If you do not fully understand the strategy, do not invest in it.”

What is your verdict on liquid alternatives?

De Roode: “Liquid alternatives can give investors exposure to alternative investment strategies in an efficient way. They provide a relatively new opportunity for most investors to engage in hedge fund-style investment strategies. These exposures can create more balanced portfolios. But the actual selection of alternative strategies depends on the investor’s characteristics and preferences. And the alternative strategy must meet the criteria for being truly alternative.”

Dynamic Strategic Asset Allocation and Stress Test tools

The allocation to liquid alternatives requires thorough analysis of the investor’s portfolio. Robeco’s Dynamic Strategic Asset Allocation (DSAA) and Stress Test (ST) tools are powerful instruments with which to evaluate the impact of adding liquid alternative strategies to an investment portfolio. They can guide an investor to the optimal level of liquid alternatives allocation. Read also:

‘The dynamic duo: how to really understand the nature of your investment portfolio’.

Leave your details and download the report.

This report is not available for users from countries where the offering of foreign financial services is not permitted, such as US citizens and residents.

重要事項

当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。

ご契約に際しては、必要に応じ専門家にご相談の上、最終的なご判断はお客様ご自身でなさるようお願い致します。

運用を行う資産の評価額は、組入有価証券等の価格、金融市場の相場や金利等の変動、及び組入有価証券の発行体の財務状況による信用力等の影響を受けて変動します。また、外貨建資産に投資する場合は為替変動の影響も受けます。運用によって生じた損益は、全て投資家の皆様に帰属します。したがって投資元本や一定の運用成果が保証されているものではなく、投資元本を上回る損失を被ることがあります。弊社が行う金融商品取引業に係る手数料または報酬は、締結される契約の種類や契約資産額により異なるため、当資料において記載せず別途ご提示させて頂く場合があります。具体的な手数料または報酬の金額・計算方法につきましては弊社担当者へお問合せください。

当資料及び記載されている情報、商品に関する権利は弊社に帰属します。したがって、弊社の書面による同意なくしてその全部もしくは一部を複製またはその他の方法で配布することはご遠慮ください。

商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会

本記事に関連するテーマ: