12.26.2013
By Terry Flanagan

Alternative Funds See Demand Spike

A number of factors have encouraged some alternative managers to create or subadvise ’40 Act offerings, while a desire for diversification and a generally bleak outlook for traditional equity and fixed income markets has spurred demand from retail investors and their advisors.

“The space is continuing to grow dramatically,” said Jason Steuerwalt, senior research analyst, Litman Gregory. “There are a number of options in terms of the different types of alternative products coming out in ’40 Act structures, from long/short equities, where there have been a number of offerings for years, to some of the newer strategies, like distressed credit, event-driven, managed futures.”

Jason Steuerwalt, Litman Gregory

Jason Steuerwalt, Litman Gregory

Litman Gregory is an investment adviser with four major lines of business: a private client business for high net worth individuals and families, as well as smaller institutions; a publishing business consisting of a retail-focused newsletter, as well as a web-based offering that’s targeted to professional investment advisers; a portfolio strategy business, where Litman Gregory provides an outsourced research platform for registered investment advisers, where it’s paid fees for its model portfolios and manager selection; and mutual funds where it aggregates managers across different strategies.

A growing number of alternative strategies are available to a broader group of investors through ’40 Act structures with lower minimums, more transparency, and more liquidity than hedge funds.

“The big theme is that managers who have only traditionally operated in hedge funds are coming to market in the mutual fund space, and lining up to get a piece of the hundreds of [billions] that are invested there now,” said Steuerwalt.

Sensing the massive opportunity in catering to a broader investor base, investment managers have flooded the market with liquid alternative products. Litman Gregory has led to the conclusion that the quality of offerings varies widely. “The democratization of the alternatives space is good overall, but creates a lot for people to sort through, especially for people who are not familiar with hedge funds,” said Steuerwalt.

Funds with high fees, limited track records, and questionable strategies underscore the necessity of good research and diligence.

“People need to be careful in allocating to alternatives because there’s a wide range of quality and expense ratios,” said Steuerwalt. “When you’re talking about something that has a four percent expense ratio versus one and a half, that adds up quickly. People need to educate themselves, and/or use advisers with some familiarity with alternatives. Just as with traditional offerings, there are good choices and bad choices, and you can experience a wide variety of outcomes.”

Steuerwalt joined Litman Gregory this year from Hall Capital, where he spent 12 years, the last six or seven covering hedge funds and opportunistic private credit funds. “That’s where I’m spending most of my time,” he said. Across the board there’s a lot of new offerings. In the multimanager space, we have one and there are probably dozens of others. Some hedge funds have their own mutual funds, and there are some that are subadvisors to multi-manager offerings. I’m trying to find managers that are a fit to use as subadvisors for our multimanager fund.”

Litman Gregory has an international fund, a U.S. equity fund, a small cap fund, and an alternatives fund. “There are three to seven subadvisors in each of those funds,” said Steuerwalt. “They’re multimanager, not fund of funds, because we get a concentrated best ideas portfolio from each of the subadvisors. The research I do applies to all four businesses, so I am looking for managers that we can use in our private client business, that can also be on our portfolio strategies platform, and that we can put into our multimanager funds. And the research gets written up and distributed in the newsletters as well.”

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