Where Can Liquid Alternatives Fit in a Portfolio?

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Where Can Liquid Alternatives Fit in a Portfolio?

RiverPark Structural Alpha Fund
Liquid alternatives have become a more prevalent and important tool in the investors’ tool box. According to industry statistics, since 2008 over 400 new funds and roughly $250 billion in net assets have emerged in the Liquid Alts space, yet most industry pundits believe that this is only the beginning. While the past few years have been largely bullish for equities, investors are beginning to think about how their portfolios will perform as both interest rates and volatility move higher. It is within this context that the discussion about liquid alternatives is taking shape.

What They Are

Liquid Alternatives are simply hedge fund strategies wrapped in a mutual fund format that conforms to the Investment Company Act of 1940. The term refers to a large and diversified offering of strategies that range from commodities to long/ short equity to multi-strategy/multi-manager funds. From a practical standpoint, investors should view these strategies as a way to diversify either bond or stock holdings in order to provide non-correlated returns to their investment portfolios.

While the entrenched establishment of old Wall Street has a long history of favoring institutions over individuals, and the ultra-high net worth over the mass affluent, Liquid Alts represent an area in which the average investor is making significant inroads in terms of access to top quality investment ideas. Growth in liquid alternatives is expected to surpass that of traditional alternative strategies. Most of this growth is expected to come from smaller investors, who have become increasingly more sophisticated consumers of financial products. In addition, recent experience has taught investors the importance of cushioning portfolios against downside risks in order to improve risk-adjusted returns.

The rise of liquid alternatives doesn’t just represent a democratization of the alternative investing landscape, but an evolution in how investors can gain access to strategies that they could never invest in before. Beyond the reduced barrier to entry in the form of low minimum investments, investors who choose liquid alternatives over traditional alternatives get the added benefits of better reporting, increased transparency, and more liquidity.

Be sure to also check out the Specialized Funds page.

Using Liquid Alts in Your Portfolio

Alternatives have moved beyond the closed partnership structure and into the mutual fund space, and have shifted the investing power back in the hands of the average investor. Of course, with great power comes great responsibility. Education is the key to successful, widespread adoption of these funds by the investing public. The good news is that virtually all the data necessary to properly evaluate the strategy and manager is widely available from trusted sources.

See also our list of 10 Mutual Funds for Hard to Reach Places.

The current investment environment has been great, but strong equity returns, low interest rates, and low volatility is not sustainable indefinitely. To achieve sustainable and repeatable positive returns, the 60% stock, 40% bond asset allocation is no longer sufficient or necessary. Endowments and other institutions have long used alternatives to diversify their portfolios, and the barriers that once made it hard for individual investors to replicate what these institutions were doing have fallen. Liquid Alternatives allow investors to address their need for both risk management and diversification.

The Bottom Line

A careful selection of liquid alternative strategies can help reduce allocations to the traditional bond and stock categories, adding diversified sources of returns with low correlation to the assets they are replacing. In addition, adding the right liquid alts to a portfolio may also reduce volatility.

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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RiverPark Structural Alpha Fund

Where Can Liquid Alternatives Fit in a Portfolio?

Liquid alternatives have become a more prevalent and important tool in the investors’ tool box. According to industry statistics, since 2008 over 400 new funds and roughly $250 billion in net assets have emerged in the Liquid Alts space, yet most industry pundits believe that this is only the beginning. While the past few years have been largely bullish for equities, investors are beginning to think about how their portfolios will perform as both interest rates and volatility move higher. It is within this context that the discussion about liquid alternatives is taking shape.

What They Are

Liquid Alternatives are simply hedge fund strategies wrapped in a mutual fund format that conforms to the Investment Company Act of 1940. The term refers to a large and diversified offering of strategies that range from commodities to long/ short equity to multi-strategy/multi-manager funds. From a practical standpoint, investors should view these strategies as a way to diversify either bond or stock holdings in order to provide non-correlated returns to their investment portfolios.

While the entrenched establishment of old Wall Street has a long history of favoring institutions over individuals, and the ultra-high net worth over the mass affluent, Liquid Alts represent an area in which the average investor is making significant inroads in terms of access to top quality investment ideas. Growth in liquid alternatives is expected to surpass that of traditional alternative strategies. Most of this growth is expected to come from smaller investors, who have become increasingly more sophisticated consumers of financial products. In addition, recent experience has taught investors the importance of cushioning portfolios against downside risks in order to improve risk-adjusted returns.

The rise of liquid alternatives doesn’t just represent a democratization of the alternative investing landscape, but an evolution in how investors can gain access to strategies that they could never invest in before. Beyond the reduced barrier to entry in the form of low minimum investments, investors who choose liquid alternatives over traditional alternatives get the added benefits of better reporting, increased transparency, and more liquidity.

Be sure to also check out the Specialized Funds page.

Using Liquid Alts in Your Portfolio

Alternatives have moved beyond the closed partnership structure and into the mutual fund space, and have shifted the investing power back in the hands of the average investor. Of course, with great power comes great responsibility. Education is the key to successful, widespread adoption of these funds by the investing public. The good news is that virtually all the data necessary to properly evaluate the strategy and manager is widely available from trusted sources.

See also our list of 10 Mutual Funds for Hard to Reach Places.

The current investment environment has been great, but strong equity returns, low interest rates, and low volatility is not sustainable indefinitely. To achieve sustainable and repeatable positive returns, the 60% stock, 40% bond asset allocation is no longer sufficient or necessary. Endowments and other institutions have long used alternatives to diversify their portfolios, and the barriers that once made it hard for individual investors to replicate what these institutions were doing have fallen. Liquid Alternatives allow investors to address their need for both risk management and diversification.

The Bottom Line

A careful selection of liquid alternative strategies can help reduce allocations to the traditional bond and stock categories, adding diversified sources of returns with low correlation to the assets they are replacing. In addition, adding the right liquid alts to a portfolio may also reduce volatility.

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