Liquid Alternatives Begin to Address Performance Questions, But Concerns Remain

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Liquid Alternatives Begin to Address Performance Questions, But Concerns Remain

Justin Frankel head shot
As the popularity of liquid-alternative funds increases, there remain concerns over how these funds will perform once the current bull market subsides. Questions also linger as to how the performance of these more liquid strategies will compare with traditional alternative partnership strategies. While more time and evidence is needed to address both of these issues completely, a recent report from industry research firm Preqin offered up some evidence that liquid alts can deliver on their promise of performance.
The report, released earlier this month, found that the average alternative mutual fund returned 4.36% in 2014, beating the average single manager hedge fund return of 3.78%. Although it is hard to say with certainty, a large part of this relative outperformance is probably due to the lower fees associated with liquid alternatives. According to that same Preqin report, the universe of liquid alternatives expanded in 2014 with 53 new fund launches. There are now close to 400 active liquid alternative mutual funds with combined assets under management of $240 billion.

Launches and inflows prove that investors are shifting assets to liquid alternatives in favor of other asset classes as a way of diversifying their portfolios. However, evidence suggests that individual investors remain under-allocated to alternatives relative to institutional investors. This implies not only huge growth potential, but also hesitation on behalf of individual investors and their advisors to rush into strategies that have not been tested in anything other than a benign investment environment.

Most of this potential growth is only likely to be realized once the current bull market cools off. Clients and product manufacturers may be pushing for greater adoption of alternative investment products, but investment advisors are still reluctant to embrace investments with relatively short track records. Advisors are correct to take a prudent stance, as little about the current market environment can provide much insight into what types of performance can be expected once volatility and interest rates move higher. Sure, the volatility witnessed in months like October and December 2014 might provide a few clues, but given the short duration of those sell-offs, and the quickness with which markets rebounded, advisors need to see more evidence of the efficacy of these strategies before widespread adoption can take place.

Against the backdrop of a multi-year bull market in equities, low interest rates, low levels of market volatility, a strengthening dollar and declining oil prices, investors may have become too complacent. Alternatives may be the right solution to address this complacency while maintaining exposure to equities. If Liquid Alternatives continue to demonstrate positive performance relative to traditional alternatives, inflows and new offering launches will continue to increase. More and better choices will only be a net positive for investors who are looking for ways to participate in equity markets while still having a cushion during market swings, provided that they are willing to do their homework when it comes to choosing the appropriate strategy and manager to meet their investment objectives.

About RiverPark Structural Alpha Fund

Justin Frankel co-manages the RiverPark Structural Alpha Fund with Jeremy Berman. Prior to joining RiverPark, Justin and Jeremy managed the same strategy as a hedge fund since 2008, and that predecessor fund was converted into a mutual fund in June of 2013.

The RiverPark family of funds consists of seven funds across a variety of equity and fixed income offerings, with a combined $3.6 billion in assets under management. The RiverPark Structural Alpha Fund is a Market Neutral strategy, and is one of three liquid alternative strategies offered by the firm.


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Justin Frankel head shot

Liquid Alternatives Begin to Address Performance Questions, But Concerns Remain

As the popularity of liquid-alternative funds increases, there remain concerns over how these funds will perform once the current bull market subsides. Questions also linger as to how the performance of these more liquid strategies will compare with traditional alternative partnership strategies. While more time and evidence is needed to address both of these issues completely, a recent report from industry research firm Preqin offered up some evidence that liquid alts can deliver on their promise of performance.
The report, released earlier this month, found that the average alternative mutual fund returned 4.36% in 2014, beating the average single manager hedge fund return of 3.78%. Although it is hard to say with certainty, a large part of this relative outperformance is probably due to the lower fees associated with liquid alternatives. According to that same Preqin report, the universe of liquid alternatives expanded in 2014 with 53 new fund launches. There are now close to 400 active liquid alternative mutual funds with combined assets under management of $240 billion.

Launches and inflows prove that investors are shifting assets to liquid alternatives in favor of other asset classes as a way of diversifying their portfolios. However, evidence suggests that individual investors remain under-allocated to alternatives relative to institutional investors. This implies not only huge growth potential, but also hesitation on behalf of individual investors and their advisors to rush into strategies that have not been tested in anything other than a benign investment environment.

Most of this potential growth is only likely to be realized once the current bull market cools off. Clients and product manufacturers may be pushing for greater adoption of alternative investment products, but investment advisors are still reluctant to embrace investments with relatively short track records. Advisors are correct to take a prudent stance, as little about the current market environment can provide much insight into what types of performance can be expected once volatility and interest rates move higher. Sure, the volatility witnessed in months like October and December 2014 might provide a few clues, but given the short duration of those sell-offs, and the quickness with which markets rebounded, advisors need to see more evidence of the efficacy of these strategies before widespread adoption can take place.

Against the backdrop of a multi-year bull market in equities, low interest rates, low levels of market volatility, a strengthening dollar and declining oil prices, investors may have become too complacent. Alternatives may be the right solution to address this complacency while maintaining exposure to equities. If Liquid Alternatives continue to demonstrate positive performance relative to traditional alternatives, inflows and new offering launches will continue to increase. More and better choices will only be a net positive for investors who are looking for ways to participate in equity markets while still having a cushion during market swings, provided that they are willing to do their homework when it comes to choosing the appropriate strategy and manager to meet their investment objectives.

About RiverPark Structural Alpha Fund

Justin Frankel co-manages the RiverPark Structural Alpha Fund with Jeremy Berman. Prior to joining RiverPark, Justin and Jeremy managed the same strategy as a hedge fund since 2008, and that predecessor fund was converted into a mutual fund in June of 2013.

The RiverPark family of funds consists of seven funds across a variety of equity and fixed income offerings, with a combined $3.6 billion in assets under management. The RiverPark Structural Alpha Fund is a Market Neutral strategy, and is one of three liquid alternative strategies offered by the firm.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next