Jeff Benjamin

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Buyer beware: Liquid alts are not created equal

A world where big performance disparities are the norm

Nov 11, 2014 @ 12:15 pm

By Jeff Benjamin

Financial advisers wading into the liquid alternatives waters can learn a lot from the humbling first-effort by Morgan Stanley, which is proving that performance matters, and disparity is a big deal in this space.

As detailed by DailyAlts, the market has not been kind to Morgan Stanley's AIP Dynamic Alternative Strategies Fund (DASAX), particularly when compared with the Goldman Sachs Multi-Manager Alternatives Fund (GMAMX).

The two multialternative-strategy mutual funds, both launched on April 30, 2013, have found wildly different fortunes, which perfectly underscores one of the biggest risks of investing in liquid alternatives: Extreme performance disparity.

From inception through last week, the Goldman Sachs fund not only has gained 7.2%, but also grew to $775 million. That compares with a decline of less than 1% for the $24 million Morgan Stanley fund.

Year-to-date, neither fund is keeping up with the Morningstar Inc. category average of 4.8%. The Goldman fund, which has a 2.55% expense ratio, is up 2%. Over the same period, the Morgan Stanley fund, which has a 2.49% expense ratio, is down 0.4%.

That kind of disparity would be more surprising if it weren't so common in the alternative-investing space.

Unlike traditional long-only strategies that tend to rely on a lot of market beta, most alternative strategies are designed around capturing alpha above a market benchmark at the individual manager level. That means performance dispersions can be dramatic between the best and worst alternative funds in a given category.

A study by Wilshire Funds of four traditional and four alternative strategies over the 10-year period through 2012 shows that alternatives are not likely to move in lockstep the same way traditional strategies often do.

Among traditional investments, the 10-year annualized returns of large-cap, small-cap and international equities, as well as core fixed income, had top-to-bottom quartile performance dispersions of between 2.4% and 5%.

But among alternatives, including relative value, macro, event driven and equity hedge, the top-to-bottom quartile dispersions over the same 10 years ranged from 15.7% to 19.8%.

In essence, you're paying good money for alpha in the liquid alternatives space, but the flipside of those higher fees is that the fund industry falling over itself to launch new products as quickly as possible.

For financial advisers who are now staring up at a growing mountain of more than 480 liquid alt funds, this example emphasizes the need for due diligence more than ever. And, along those lines, it should be a given that when it comes to alternatives the averages can be deceiving and beta is not your objective.


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