Liquid Alternatives: A Blurring of the Lines

Terry Flanagan

Liquid alternatives combine hedge fund strategies within mutual fund and ’40 Act investment vehicles, thereby serving as a bridge between the traditional and alternative investment worlds.

The mingling of these very different worlds entails a significant cultural shift for each.

“It’s important to note that liquid alts isn’t a protected term or even a defined term,” said Michael Galvin, product manager at Linedata. “It’s a broad brush stroke to explain the blurring of the lines between the traditional and the alternative worlds.”

The alternative world is used to a much less frequent valuation cycle, generally monthly, in some cases weekly. The traditional world is looking for daily cycle in terms of getting more frequent valuations frequently and also being able to get in and out of the fund quickly.

“That’s going to pose a challenge for the alternative world,” said Galvin, who has product responsibility for Linedata’s Admin Edge fund administration system and Mfact fund accounting system. “They are used to very long liquidation cycles. If an investor wants to get out of the fund, they don’t necessarily that day produce the cash to give to the investor. They have some time, whereas in the daily world, that’s not the case.”

For fund administrators, liquid alts pose the challenge of bringing together separate systems that they currently operate for traditional and alternative investments. “They have had separate systems to handle both types of structures,” Galvin said. “With the advent of liquid alts, third party administrators are looking to administer both sets of business. The decision is whether to develop a platform that can do both or to do a separate kind of business for each type of fund structure.” The single platform approach is preferable, he said.

Hedge funds that wish to enter the liquid alts market must be prepared to navigate the regulatory oversights that exist for the traditional world. “They’re going to be marketing to the more traditional investor who’s protected under the SEC guidelines,” Galvin said. “There will be more scrutiny on their investments and their funds. They’re going to have to offer more transparency than they used to. The frequency of the reporting is going to be increased from what they’re used to as well.”

Traditional investors are looking to diversify into liquid alts to increase yields in a low interest rate environment, while alternative managers, for their part, view liquid alts as an opportunity to expand their asset base. “Both sides have their own challenges to be able to support these types of structures,” said Galvin. “It’s not something that you can just necessarily switch on overnight.”

Related articles

  1. Turquoise CEO Barnes Aims to Continue Growth

    Funds and advisers that market themselves as having an ESG focus would have required disclosures.

  2. Concerns about greenwashing continue said American Century Investments.

  3. Buy Side Forced to Review Collateral Arrangements

    Direct clearing offers more efficient management of cash and securities collateral.

  4. European asset managers have upcoming compliance and regulatory disclosure obligations under SFDR.

  5. ESG funds remain statistically cheaper and better performing than non-ESG peers.