Year End Liquid Alternatives


The last year has been surprising in many ways for investors and advisors, alike. In what will be remembered for a wild ride in equities, and maybe (finally) the end to the 30-year bull market for core bonds, one thing was easily predictable – the financial press reaction to liquid alternatives’ (Diversifiers) performance for the year.

While equities will close out at the highs and bonds will finish positive (near 2%), the headlines on hedge funds and alpha strategies have been overwhelmingly negative.

Pension plans report hedge fund allocation reductions and eliminations weekly. Active management, of any kind, is under siege with the same criticisms - why pay the higher fees associated with these types of investments when pure beta has been a better performer at a fraction of the cost?

While Institutional and high net worth investors have long embraced the wisdom of paying up for alpha, expect the inevitable wave of pundits deploring the high cost and poor performance of these vehicles as we enter the new year.

But our role is to help advisors develop portfolios for their clients that have market cycle diversification. We believe understanding the liquid alternative/active credit strategy universe and offering (monitoring) a select number of these strategies within our platform is critical to that mission. Partnering with Rocaton Advisors, our platform delivers access to what we consider to be top-tier management firms, providing strategies with limited correlations to traditional stock and bond beta, and an ability to produce alpha within a framework of liquidity and risk management – delivering 2016 results that were not at all disappointing. In most cases these strategies produced low correlation, above average returns for the category, or both - which is the exact result high net worth investors seek to protect their wealth.

Managed Futures were disappointing from a return standpoint but let us not forget their positive effects during the first 45 days of 2016. Active Credit managers finally got the rise in rates many had been waiting for, and have performed exceptionally over the last 90 days. Our Long/Short Strategies all beat the industry averages (although we did remove a poor performer earlier this year). Equity Market Neutral and Multi-Alternative ground out positive returns, with low correlation to their benchmark of AGG.

Simply stated, the death of these strategies is over reported. The main story isn’t that our platform strategies had a successful 2016, but rather, that you shouldn’t accept every headline as fact. With careful selection and monitoring, finding the right strategies to compliment beta holdings is possible, and advisors who understand this will set themselves apart in what is quickly becoming the era of “my fees are lower than your fees.”

 

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. FTJ FundChoice does not guarantee any minimum level of investment performance or success of any index portfolio or investment strategy. Past performance is not indicative of future results. Information obtained from third party sources are believed to be reliable but not guaranteed. FTJ FundChoice makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

 


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