Liquid alternatives

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What are liquid alternatives?

Liquid alternatives have been in place for many years within the hedge fund world but are opening up in new flexible constellations that professional investors favor.

Liquid alternatives connect the gap between hedge funds and mutual funds and benefits from the best of both sides including diversification, sophistication, transparency, flexibility, liquidity and accessibility.

Since alternative investments have a low correlation to traditional investments alternative investments can be used as a way of reducing the overall risk of your investment portfolio by diversifying it.

The word “Liquid” refers to the ease with which investors can enter and exit their investment in these funds. Like traditional mutual funds they can be bought and sold daily, which is a much different from the traditional hedge fund universe.

Alternatives” are investments that falls outside the traditional areas like cash, bonds and stocks and include investments in tangible assets like private equity, real estate and infrastructure as well as commodities and currencies.

While there is no universal definition for liquid alternative investments, these strategies are typically not benchmarked and aim to generate a total or absolute return and can have the ability to take both long and short positions.

Why liquid alternatives?

Traditionally investors have had four major asset classes in which to invest in. After a period with unprecedented central bank intervention there are a growing list of risk factors that could cause the next bear market:

  • Stocks are at all-time highs.
  • Bonds have already suffered as interest rates rise.
  • Cash deposited in banks cost money with negative rates.
  • Real estate is at all-time highs.

How to use liquid alternatives?

Liquid alternatives come in many different forms and sizes and works as an excellent portfolio addition. Depending on the investment strategy of the liquid alternative fund, it could replace a portion of your existing equity allocation to help minimize volatility or insulate against market drawdowns, replace a portion of your existing fixed income allocation that may enhance returns and yield without increasing volatility, or replace a portion of each for more balanced benefits.

Liquid alternative investment strategies are designed to play various roles within a diversified portfolio to help investors achieve those goals.

Benefits of adding liquid alternatives to a portfolio

  • Diversification
  • Increased likelihood of consistently positive returns, regardless of the market
  • Increased Sharpe ratio
  • Lower volatility
  • Attractive non-correlated returns
  • Superior downside protection
  • Low-to-negative correlation to equity and fixed income markets