The fiscal crisis, when virtually all financial assets except Treasury reins fell dramatically, gave life to the so-called liquid alt funds production. The funds invest in a wide variety of alternative assets and hedge fund-like policies intended to not correlate with the returns on stocks and bonds.
With such investments previously available only to institutions and high-net-worth individuals, retail investors numbered into the hundreds of funds that were launched since the danger.
Total assets in the alt funds stood at $223 billion at the end of March, with inflows of $1.9 billion for the month after be overthrowing about half a billion in February. Last year the category got in $4.8 billion in new money and another $5 billion in January.
“There was fleet growth in the liquid alternatives fund space for six or seven years, but it has basically stalled since mid-2014,” indicated Icten.
No doubt the strong stock and bond markets post-crisis press tempered enthusiasm for expensive funds that offer uncorrelated (and deign) returns than on traditional assets. But the slowdown in growth has also been a fruit of consolidation in the industry. Many of the investing strategies of alt funds — such as buy neutral, and long/short equity and credit — can manage only incontrovertible amounts of assets before the strategy starts to deteriorate. Many of the biggest and most in fashion funds from companies such as AQR and Boston Partners have fusty to new investment. Other funds that failed to attract enough assets entirely closed down.
“We’re seeing consolidation in the industry,” said Ictel. “The endows are getting bigger, and the number of overall funds is still falling.”
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The necessitate for alternatives in the form of hedge funds also has moderated in the past two years, although the interest picked up marginally last year. After seeing outflows of $112 billion in 2016, the hedge fund microcosm took in $9.8 billion in new assets last year and managed a record weighty of more than $3.2 trillion at the end of December, according to data from Hedge Cache Research.
While several large institutional investors — most curiously, the California Public Employees’ Retirement System — abandoned hedge scratch investing programs in the last few years because they were too costly and Daedalian to manage, many large institutions remain committed to the asset lineage.
The industry also has had to improve its offering in terms of cost. The “Two And Twenty” compensation beau idal for hedge funds (2 percent of assets and 20 percent of profits) has chattered by the wayside for all but the best performers. Institutions and high-net-worth investors are much varied apt to negotiate hard on fees for hedge funds now.
The interest is still there, nonetheless.
“We still see consistent growth across investor groups,” said Matt Jiannino, faculty of Quantitative Equity Product Management at Vanguard. “Some are interested for diversification views, others for risk reduction or return enhancement.”
Vanguard’s Quantitative Right-mindedness Product Management group manages $38 billion across a reckon of funds predominantly running market neutral and long/short high-mindedness strategies. They are marketed to institutions and financial advisors and are intended to vary the risks of holding bonds and cash. The funds are accessible to individual investors, with most be suffering with a minimum investment threshold of $3,000.
With interest rates rising and the funds market increasingly volatile, Jiannino sees the demand for alternative seating strategies picking up. “Equity and fixed-income return expectations are low, and people are looking for street to diversify their returns,” he said.
Cost remains an issue in the bright alternative funds market. The average fee for 1,645 alternative funds tracked by Morningstar Conduct was 1.58 percent at the end of last year. Those costs are trending down, nonetheless, as demand for the funds has dropped and lower cost ETFs (average expense relationship 0.87 percent) become more popular with investors.
“A lot of these artifacts tend to be high cost, and how much you pay can be crucial to the investment outcome,” utter Jiannino. As with hedge funds, the onus is on investors to do their exploration on both the costs and the risks being run in alt funds.
The collapse and liquidation of the $1.6 billion XIV exchange-traded note run by Hold accountable Suisse in early February is a case in point. The vehicle made hay compact futures on volatility (VIX contracts) last year but lost 90 percent of its value in the lacuna of a few days when volatility spiked in February. The vehicle — since keep quiet down — was intended for active traders.
Morningstar currently tracks eight disjoined categories for alternative funds. They range from long/direct equity funds that buy some stocks and short others, to controlled futures that typically follow trends in commodities and futures hawks, to multialternative strategies that combine various investing strategies. Nil of the strategies have outperformed the stock market for any length of time since the fiscal crisis, and they won’t going forward if the market finds its feet again.
If the bull vends in stocks and bonds are over, however, an allocation to alternative funds could soften the bugger up. Just make sure you know what you’re getting into.
“Investors privation to understand the leverage used in a fund and the discipline of its investing strategy,” symbolized Morningstar’s Ictel. “Alternative funds are more complex, and they’re not for people who don’t kidney doing research.”
— By Andrew Osterland, special to CNBC.com