Liquid Alternatives Move Downstream

Terry Flanagan

As allocations to alternative assets increase across both retail and institutional channels, alternative managers are expanding strategies available to institutional investors, as well as moving downstream to diversify their client base by manufacturing liquid alternative mutual funds.

“Demand from both the high net worth and the institutional market is helping more managers enter this space,” said Brian Haskin, CEO of Alternative Strategy Partners, a Los Angeles-based company that advises wealth managers about liquid alternatives. “We’re continuing to work with advisers that are looking to get more exposure to the alternative space.”

As liquid alternative mutual funds have gained ground, so has the number of strategies available, which has led to a more eclectic mix of liquid alternatives. “We’ve seen a lot of single-strategy, single-manager funds entering the market,” said Haskin. “A lot of advisers originally allocated to multi-strategy alternatives. They typically made an allocation of 10% of the portfolio to a multi-strategy mutual fund, but they’re beginning to think about going to individual strategies” such as long short equity and long short credit.

According to Cerulli Associates, private equity and alternative firms are moving down market to support the retail marketplace.

“Private investment managers, following in the tracks of hedge-fund-focused alternative firms and traditional long-only managers, are tapping the public markets,” said Michele Giuditta, associate director at Cerulli, in a release. “Delivering illiquid private investments to the retail marketplace is challenging, as the typical buyout fund on average has a lifecycle of approximately 10 years.”

At the same time, traditional asset managers are diversifying their product roster to include alternative investments. John Hancock, for example, uses Standard Life Investments to manage its John Hancock Global Absolute Return Strategies Fund, which had $5.5 billion in assets under management as of the end of the second quarter.

Haskin tells of one financial adviser who manages money for ultra high net worth individuals, and historically has used a high percentage of alternative investments via hedge funds. Over the past several years, this adviser has allocated a portion of his clients’ assets to liquid alternative mutual funds.

“He’s still heavily invested in less liquid, higher expected return strategies in the LP market, where he can get access to private equity-type structures, or less liquid credit or activist strategies that may not fit well in a mutual fund,” Haskin said. “But to the extent that you can keep assets liquid, and get a hedge fund-type strategy like merger arbitrage, global macro, managed futures, long short equity which all fit well in a mutual fund format, then he’s going to allocate a portion of the portfolio to that.”

Featured image via Fauna & Flora /Dollar Photo Club

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