Really? That is different from what I’ve heard from people who run them and marketing people at my and other fund house. They say there has been a ton of talk but no allocations outside of discretionary models. Not traction with advisors. That’s fine, but it makes it much more of an elephant hunt. You’d know better than me for sure, but that is in contradiction to what I am hearing. Additionally, I’ve heard higher minimum institutional investors will likely stick with the less liquid structures for the time being.
Any stats on AUM to support what you say? I haven’t pinged anybody about this in about 5 months so my view could be out of date.
I do like the Gotham fund, as I’m a Joel Greenblatt fan and think he is doing it right (fee neutral to the LP). I know they’re doing well, but from what I hear they got some model allocations.
Stats are hard to come by since it’s really Morningstar you have to rely on and they are still struggling to accurately categorize the different kinds of Alts. But, their general “Alternative” category has taken in $14.6B in net positive flows YTD (as of 6/30). Compare that to, say, “U.S. Equity” which is only net positive by $9.5B.
What makes the Alt category more intriguing is the low level of assets currently allocated to alts. There’s only $156B in alts all-in compared to something like U.S. Equity where there’s $4.8T. What’s more, the 1 year organic growth rate is highest in the Alts space at 30.3%. International Equity is second at 9%.
So, it’s fair to say liquid alts aren’t a popular asset class if you’re looking at current allocations. But, from my perspective (and every other salesperson’s), if you want to skate to where the puck is going to be, you’re talking about liquid alts.
Advisors probably struggle cuz they charge 1%, then they put them in a fund that charges 2.5%, and usually in a fund that will trail bull market returns. Doesn’t sound like a winning bet if you want to stay in business.
In addition, a lot of the strategies (as noted above) are garbage or not run by high quality HF mgrs. Once that changes (and it is) and fees are recalibrated I think its huge and will reshape a big portion of the alts community (long/short and global macro in particular)
I see a lot of these funds now and even more replication strategies, just a matter of time and refinement until adoption starts
Keep in mind though, they’re primarily being used as a fixed income alternative so trailing the S&P is meaningless. Advisors are worried we’re (eventually) entering a secular bear market in fixed income and they need something to replicate the returns and income a core bond strategy has provided over the last 30 years.
I don’t hear anyone talk about using alts as a way to knock the ball out of the park. Most are fine with 4-7% net returns.
^ yes diversification while not drasticly reducing expected rates of return is the selling point. Advisors need to understand that alternative investments are not intended to outperform equities in a bull market. I still have concerns that these funds won’t prove to provide the diversification benefit when they are needed most.
As far as growth, liquid alt mutual funds had $25B in AUM in 2003 and $300B in AUM this year. Many projections that I’m reading have this segment at $600B in 3 to 5 years.
If you’re an advisor that believes that these will perform correctly, when are you putting clients into these funds? Ideally you rotate to this asset class as fixed income, and to a lesser extent equity, becomes overvalued. In an environment like ours where fixed income will underperform over the next 10 years and equities are fairly valued, alternative investments are positioned perfectly. The asset growth over the last 5 years should not be an indicator of the rate expected over the next 5 years. I would expect more advisors will turn to alts as their meathod of diversifying client portfolios, rather than bond funds.
Ok, I spoke to a couple of people because it’s Friday afternoon and I have to stay late for a call anyway. Here are the takeaways I got:
Like Sweep said, don’t trust the category on Morningstar. It is likely inflated. The fourth largest “alternative” fund by AUM on there (US funds) is the PIMCO EM Currency Fund. Odd classification.
Advisors are not allocating to liquid alts. Some private bankers consider it but most of their clients are already in hedge funds as accredited investors. A lot of talk, no action. There is only one fund that advisors have allocated to and it was chasing performance (Marketfield, see below).
The growth in liquid alternatives has been driven by model allocations. Mainstay has $20B, Gateway has $8B and AQR managed futures has 6B. Much of this is models. Mainstay raised 7B in the last year alone.
While there has certainly been much higher growth than any other broad asset class in US funds, it has been off of a very low base. The space is rapidly developing and things are really just starting to get to big time.
Going forward, especially if we get a market pullback liquid alts are going to become a big deal. Especially the winners in a down market. Especially if we equities fall, IG bonds relatively flat and alts up.
So, it seems like people should be ready but there has been much more flow in traditional assets, namely international (which is what I work on). That’s probably why I was told flows are so low, because relative to international they are.
This is very true. Indeed, my job is getting our funds on those models. These “Alternative Completion Portfolios” are a prefered way for advisors to access the alternatives market without having to do their own due diligence. FINRA is already cracking down on advisors using Alts - especially non-traded alts - and if an advisor is picking their own alt funds and gets audited or sued, FINRA fully expects to see a ton of due diligence done by the advisor. I’m talking on-site visits, PM meetings, all the way down to notes taken at conference breakout sessions.
But, just because they’re in a model doesn’t mean advisors aren’t “picking” them. For example, many advisors will choose their own funds for 90% of their clients’ portfolios then add a 10% allocation to the Alternative Completion Portfolio. Now, this may or may not be the best way to access the market; it’s certainly the safest in terms of CYA.
Moving forward as more education around Alts becomes available, and advisors get more comfortable being able to explain how something like a managed futures fund works, then they’ll buy their own. Right now it is mainly the very large teams that can afford to do their own DD that are doing it themselves.
So they are getting flows and advisors are allocating to them, just not in a traditional manner.
I think advisors are investing in these funds at an increasing rate, although the initial AUM was very low. My team researches private placement alts and we are encountering many funds which are launching replication funds as a 40 Act registered fund. Top hedge funds are looking to increase AUM and also see this as a way to gain exposure for their firm. As we know, hedge funds can’t advertise, but mutual funds can be ranked by morningstar and put into “news articles” about who is performing best, etc.
I thought HFs could actually advertise now, didnt that change in 2013/14?
Agree advisors will use whatevers on the platform, faster/easier/less risk to them personally.
Just like actively managed MFs, there are good and bad HFs as well…the liquid alts space will be filled with the spectrum of manager quality and fund selection should matter as the vehicles grow. If I was a small AUM l/s and average/subpar mgr I’d want to open a 40 act fund to access a big avenue for new capital from a group that probably doesnt do the DD an institution does for a private fund.