Exclusive: New research service redefines 'liquid alts' for advisers

Money manager says new definition will help determine whether funds are delivering on their promises.
OCT 08, 2014
The term “liquid alternative” should be redefined so advisers can better understand whether the funds are delivering on their promises, according to a money manager who rolled out a new alts research service Wednesday. “If there's one thing the credit crisis taught us is being able to have diversification,” said Dan Thibeault, president of GL Capital Partners. But he said many products sold, marketed and analyzed as alternatives fail to deliver returns that outperform traditional stocks and bonds even though that's the fundamental goal of investing in those products. Broadly, liquid alternatives refer to alternative strategies delivered via registered mutual funds and other exchange-traded products. According to Morningstar Inc., the liquid alts market includes 465 alternative-strategy mutual funds with $161.5 billion under management. Instead of relying on database classifications and fund manager self-definitions, GL Capital Partners said advisers should look to four factors: whether the investments are correlated with economic growth, how much of their return is derived from stock and bond market risk, how large the market value of the strategy is and whether the product is easily traded. (Biggest pension shunning hedge funds a green light for liquid alts) GL Capital argues for a definition of liquid alternatives that includes only funds whose returns are not correlated with the economy, meaning returns do not move in tandem with gross domestic product, derive only a minority of the returns from the risk of the overall market, don't grow too large or widely used that they start to mimic other assets and that they actually be liquid, or easily traded. Under those parameters, just 191 of 569 funds labeled alternative by Morningstar, Bloomberg and DailyAlts — two investment-research platforms and a blog, respectively — would meet the proposed definition, according to Mr. Thibeault. He said advisers have a ways to go before using liquid alts properly and that few have access to the breadth of products and research necessary to use them well. “Retail wealth management is a really interesting area to be in,” said Mr. Thibeault. “It's a real bastion of neglect.” GL Capital, which manages investment strategies it brands “alternative,” has excluded its own investment products from consideration for the research service, which is called AdventAlts. The firm says the research will be conducted by a 28-person team that includes two doctorates, four chartered financial analysts and two certified financial planners. “We've made the information 100% objective quantifiable, and I hope that would stand the test,” said Mr. Thibeault.

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