Liquid alts funds see inflows while mutual funds see record outflows

With the overall mutual fund industry on track for a record $1 trillion in net outflows this year, doubling the record set in 2020, alternative strategy funds stand out as a rare bright spot for asset managers.

In a trend reminiscent of performance chasing or closing the barn door after the cows have escaped, alternative strategies have been gaining appeal this year, according to Cerulli Associates.

This year through September, the combination of investor outflows and market declines have pushed mutual fund assets down by nearly 25%, to $15.6 trillion. In September, total mutual fund outflows topped $100 billion, according to Cerulli.

By contrast, alternative strategy funds, often referred to as liquid alts, experienced $261 million worth of net inflows last month, and $25 billion this year through Sept, according to Cerulli.

It's admittedly a relatively small number, but big when considered in the context of record-level investor outflows across the mutual fund space.

“Liquid alts have been one of the relative bright spots and it has everything to do with people looking for diversification,” said Ben Johnson, director of global ETF research at Morningstar.

Johnson said the pattern of moving into alternative strategies is not necessarily unique to the current market environment and might suggest the actions of less-sophisticated investors.

“People always go shopping for volcano insurance after lava has burned their front step,” he said. “In this instance, I’d say people who were earlier on the bandwagon have benefited.”

The S&P 500 Index is up slightly from its recent lows for a 17% decline from the start of the year, but the trend is still lower considering the weakened state of the U.S. economy over the past two years and inflation hovering near a 40-year high.

“With the average stock and bond fund down sharply in 2022, investors have sought out alternative strategies like liquid alternatives, as they often generate differentiated and positive returns in down markets,” said Todd Rosenbluth, head of research at VettaFi.

In terms of when and how to use alternative strategies, Johnson hedged his bets with another property insurance analogy.

“You can always make a case for liquid alts, just like you can always make a case for homeowners’ insurance,” he said. “But if you want a positive expected return, those returns can come in fits and starts with liquid alts. It can feel like dead money after a decade of positive equity market returns. But we’re finally at that moment when alts are proving their worth.”