Liquid alts to get their own benchmarks

New measures aim to combat challenge of assessing performance; investible products may not be far behind

Aug 12, 2014 @ 11:56 am

By Jeff Benjamin

+ Zoom

In the ultimate seal of approval in the asset management world, liquid alternative investments are getting their own benchmarks, which means some kind of investible product can't be far behind.

Wilshire Associates Inc. rolled out two liquid alt indexes last week, and company representatives confirmed that considerations are already under way for an investible version of at least one of the new benchmarks.

Also on board the fast-moving liquid alts bandwagon is the nine-month-old Liquid Alternative Investments Co., which also has indexes for the registered alternative products and visions of licensing agreements.

“Licensing may very well come at some point down the road,” said company founder Ezra Zask. “Clearly, we now have enough liquid alts out there that indexes are critical.”

For investors and financial advisers, benchmarking registered investment products that focus on alternative strategies helps keep things in perspective, according to Jason Schwartz, president of Wilshire Funds Management.

“Certainly there is demand and a growing supply of liquid alternatives, but one of the challenges is what is the appropriate way to assess performance,” he said. “When we looked at the types of benchmarks being used, we found them to be all over the map, and that tells us there's a challenge here in terms of assessing performance.”

According to Wilshire's research, 20% of multialternative-strategy mutual funds are using cash as a performance benchmark, while some funds in the category are using long-only benchmarks like the S&P 500 Index. And still other funds are pegging their performance to popular hedge fund indexes, such as the Hedge Fund Research Inc.

“I think it's going to be fantastic, because I'm tired of being compared to the S&P or the HFRI,” said Bradley Alford, chief investment officer of Alpha Capital Management, which manages two multialternative funds of mutual funds, Alpha Defensive Alternatives (ACDEX) and Alpha Opportunistic Alternatives (ACOPX).

“I don't think there's anything negative about the liquid alternative indexes,” he added. “It continues to show that liquid alts are here to stay, and not just a flash in the pan.”

Through July, the liquid alternative mutual fund category, including nontraditional bond funds, has grown to 547 distinct funds with more than $310 billion under management, according to Morningstar Inc.

There have been 54 funds launched in the category this year, compared with 91 for all of last year, and 75 for all of 2012.

Category assets are up from $268 billion at the end of last year and have more than doubled since the end of 2011, when there were 287 liquid alt funds.

While it still remains to be seen, one potential negative of the liquid alt indexes could be bad performance in aggregate, fully illustrated for the whole world to see.

“The idea of an index does give these liquid alternatives more credibility, but I'm concerned that once people can see the performance of these funds they won't be that interested anymore,” said Jeason Dubrovay, managing partner at Blackcomb Global Advisors LLC.

“It will take some time, but I think you're going to see exactly what liquid alts are, which is high beta,” he said. “I think it's like mutual fund market timing; it will happen over a period of three or five years and people will realize they're not getting what they think they're getting.”

Mr. Dubrovay's main issue with liquid alternative strategies is that they are often marketed as pure alternatives without the caveat that they are saddled with regulations and limitations that position them well short of pure alternatives.

For example, a private or limited partnership like a hedge fund has the ability to invest in exotic and illiquid strategies that are not allowed inside registered mutual funds, “and that's where a lot of the performance comes from,” he explained.

“Also, mutual fund managers are dealing with less patient investors who may flee on a daily basis, and they can because of the liquidity of a mutual fund,” Mr. Dubrovay added.

For now, index proponents are less concerned about how liquid alts stack up against hedge funds or long-only strategies than they are concerned about giving liquid alts an index to call their own.

“Alternative investments are inherently designed to behave differently than traditional asset classes, so comparing them to well-established, long-only indices is counterintuitive,” said Mr. Schwartz. “We wanted to create a more meaningful, relevant comparison.”

In terms of capturing any of the liquid alt indexes inside something investible like an exchange-traded fund, that could be tricky, according to Todd Rosenbluth, senior fund analyst at S&P Capital IQ.

“That would involve taking something that is typically an active strategy and adding a passive override,” he said. “And these kinds of mutual funds tend to be expensive, which might not appeal to a lot of ETF investors.”

He cited one example of an alternative-strategy ETF already on the market but not pegged to a liquid alt index, the PowerShares Multi-Strategy Alt ETF (LALT), which has a 1% expense ratio and has attracted $22 million since its May 29 launch.

“It may be cheaper than a mutual fund that is a fund of these alternative strategies, but it's still expensive for an ETF,” Mr. Rosenbluth added.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Building digital relationships with a human touch

The word "robo" has stopped being a four-letter word for financial advisers. But how can it be an asset? Quovo's Jeff Hendren explains.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print