Thanks to the unconventional measures of central banks and the march of index investing strategies, we are in fact seeing the rise of a new, more aggressive version of active management.
Investment managers are launching investment products that give them more flexibility to roam around financial markets in search of alpha. The question is whether end investors will ultimately benefit from this phenomenon.
So, what are exactly Liquid Alternatives? Liquid Alternatives are complex and opaque investment wrappers that require a bit of caution. They are packaged into a fund, covering a wide-ranging category of assets, while using a hedge fund strategy. Unlike most traditional funds, they can go short, use leverage and derivatives.
The rise of Liquid Alternatives opens up a vast new market and come at a convenient time for asset managers. Now with bonds looking fairly expensive and equities unstably climbing higher, asset managers are looking for an alternative that could hold its value in dangerous waters. This is where Liquid Alternatives come into play.
The risk is that unconstrained funds are not being pitched correctly. They are marketed as uncorrelated assets that increase diversification or act as insurance protection.
Faced with a universe of styles and possible strategies, investors ought to be doing their due diligence in a similar fashion as a hedge fund.
Consider for instance, fixed income where, after three decades of declining interest rates, the normalization of monetary policy may be a headwind for returns for the coming years. In this respect, PIMCO is pursuing a push for so-called unconstrained bond funds. In practice, the funds are sold as a conservative choice, a prudent alternative to a core bond fund that might no longer be able to preserve capital.
It consists of placing bets across a wider spectrum of the fixed income market, such as emerging markets, junk debt, credit derivatives, and taking bets on the direction of interest rates.
Retail investors are only catching up with what is happening among institutional investors. This process will lead to more volatility in markets, and be consequently ready to tighten the seat belt.
Their record is not long enough to know whether they could get credit for diversification benefits. Don’t forget to do your homework before investing.