Liquid Alternatives for the Masses


New investment opportunities owing to a variety of factors such as innovation, regulation and evolving market dynamics are fueling demand for alternative assets among retail investors.

Liquid alternatives fill an important gap by offering the liquidity, transparency and ease of investment access that investors most commonly associate with traditional stock and bond funds, while at the same time capturing the benefits that investors associate with alternatives including risk diversification and, in many cases, higher alpha potential.

“In addition to market driven opportunities, increasing demand from investors is an obvious prompt for investment management providers–including hedge fund and fund of fund providers, and managers that offer both traditional and alternative strategies–to both expand their alternative product offerings and to offer existing alternative products in new vehicles and regions to allow for broader accessibility,” said Sabrina Callin, managing director in the Newport Beach office at Pimco.

Callin, who oversees Pimco’s enhanced equity index and unconstrained bond suite of products, says that nvestors should consider alternative investment strategies, which could enhance diversification and the potential for alpha, or risk-adjusted returns, because returns from traditional asset classes in coming years may be lower and more volatile than those realized historically.

Private fund offerings typically allow managers greater flexibility and a broader set of tools than public fund vehicles with daily liquidity that are more widely available like mutual funds and ETFs.

For example, certain alternative strategies may capitalize on valuable illiquidity premiums that would not be possible in a vehicle offering investors daily liquidity.

“The good news is that there are an increasing variety of potentially attractive opportunities and strategies available in vehicles that offer investors daily liquidity and can serve as a valuable complement to private fund alternatives and traditional bond and equity strategies,” Callin said.

These include a number of higher alpha potential, outcome-oriented approaches like absolute return fixed income, multi-asset strategies, market-neutral equity and long/short equity.

There are also currency, managed futures and bear-market strategies that can provide valuable diversification and flexibility within an overall portfolio. And there are commodity and other real asset strategies that capture attractive alternative sources of market risk.

Asset managers play a critical role in manufacturing and distributing alternative investment products, but that also entails responsibility to potential investors about alerting them to risks.

Maz Jadallah, AlphaClone

Maz Jadallah, AlphaClone

“Asset managers are the source of innovation for many of these products,” said Maz Jadallah, CEO of AlphaClone and manager of the ALFA ETF. “Firms have a responsibility to educate investors about alternatives products, their differences and how they should be used inside portfolios. Unfortunately, the asset management industry is full of conflicts of interest where firms promote products that are profitable over solutions that work for the investor and where

It is important for asset managers to continue to innovate in response to the evolving needs and objectives of clients, including by offering alternative investment solutions that offer attractive risk/return profiles and valuable diversification benefits.

“Of course, it is equally if not even more important that the strategies that are offered have an appropriate degree of transparency, so that investors understand the underlying risk exposures and potential downside, and also that the strategies are well aligned with the manager’s investment and risk expertise and competencies,” said Callin.

For example, to truly capitalize on some of the most attractive opportunities, extensive resources are required, including managers with exceptional and demonstrated skill, deep research capabilities, well-defined and time-tested investment processes, a global presence and a clear understanding of the underlying risk exposures.

“The ready ability to dynamically adjust risk exposures over time in response to varying market conditions and to know how these risk exposures may behave in stressed market environments is critical,” said Callin. “And having a proper alignment of interests, of course, also is imperative.”

Related articles

  1. Trading Europe From ‘Across the Pond’

    Despite difficult circumstances, demand for SFDR Article 9 funds remained sustained.

  2. Assessing Bond Liquidity
    Daily Email Feature

    Low Touch, High Liquidity

    Janus Henderson traders use a broad spectrum of electronic tools to optimize the search for liquidity.

  3. Florida CFO said ESG standards are being pushed by BlackRock for ideological reasons.

  4. Outlook 2016: Stephen Grainger, SWIFT

    The new regime requires a new investment playbook involving more frequent portfolio changes.

  5. Bats-Direct Edge Complete Merger

    DWS will hold a stake of 30% in the new company.