college planning | estate planning | insurance | InveSTInG | portfolio spotlight | real estate | retirement | tax planning
Alternatives Move Into The Spotlight
Advisors can now go well beyond the mutual fund / ETF approach as new platforms emerge .
By David Sterman
REvElERS In PAMPlonA , SPAIn And liquid alternative mutual funds and ETFs ( known as “ liquid alts ”) share a key trait . neither can withstand the stampede of a raging bull . For much of this past decade , a steadily rising bull market led a wide range of liquid alt funds to lag the gains posted by stocks . These hedge fund-like products aim to profit from volatility and uncertainty .
Fast-forward to 2022 . Suddenly , these funds are posting respectable returns , making up for lost ground in a hurry . Meanwhile , outside of public markets , a whole new set of alternative investing options have emerged for advisors looking to capture the alpha generated by private markets . let ’ s take a closer look at each segment of this diversified asset class .
Godot Finally Arrives
Many advisors likely overlooked liquid alts because for years they produced mediocre returns . These funds are built for volatility , after all — or to create positive returns when stock and bond prices are slumping , which they weren ’ t doing . It ’ s a shame , because now people likely realize that liquid alts exposure would have helped stabilize portfolios that have gone underwater in recent quarters .
To be sure , some advisors ( and retail investors ) did make the proper pivot . After five straight years of net outflows , liquid alt funds took in $ 31.83 billion in 2021 , according to Morningstar . And the interest continues to grow . “ Every single category [ of liquid alts ] has seen positive inflows this year ,” says Simon Scott , Morningstar ’ s head of alternatives research .
He notes that “ hedged equity ” funds captured the largest amount of new monies . These funds own equities and also buy options contracts to serve as a hedge to offset losses connected to market risk . Through the end of May , the category saw a further $ 6.9 billion in net inflows . With $ 24.7 billion in assets under management ( through mid-June ), the JP Morgan Hedged Equity Fund ( JHEQX ) is the category ’ s biggest and garners a five-star and “ Silver ” analyst rating from Morningstar .
Trend-following funds , which follow a strategy using the technical analysis of changing market prices , have also seen solid net inflows of $ 4.3 billion this year , “ which is no surprise when you see how well they have done ,” says Scott . The average fund in the group is up 22 % through May of this year , with some funds such as the AQR Managed Futures Strategy Fund ( AQMIX ) and the AlphaSimplex Managed Futures Strategy Fund ( AMFAX ) both up more than 45 % through the end of May . Scott adds that “ trend following in bonds and commodities has been strong , particularly for those that have higher volatility targets and so can run higher leverage .”
Will volatility in markets continue for the rest of the year ? With the Federal Reserve aggressively raising interest rates , high inflation creating economic strains and a growing pos-
july / august 2022 | financial advisor magazine | 53