Asset Owners Concur Liquid Alts Are Better Fit for Retail

At the 2014 Hedgeopolis New York conference, asset owners discussed how they invest in hedge funds, with the consensus seeming to be that the institutionalization of alternatives will continue to have an upward trajectory. For liquid alternatives, however, even though the vehicle has been gaining popularity, these asset owners did not think liquid alts have much of a place in their respective portfolios.
By Jake Safane(2147484770)
At the 2014 Hedgeopolis New York conference, asset owners discussed how they invest in hedge funds, with the consensus seeming to be that the institutionalization of alternatives will continue to have an upward trajectory. For liquid alternatives, however, even though the vehicle has been gaining popularity, these asset owners did not think liquid alts have much of a place in their respective portfolios, saying that these funds are better suited for retail investors.

One reason why liquid alts might not be attractive for institutional investors lies in the fact that one of the vehicle’s selling points—liquidity—is not as crucial to these types of investors who have a greater ability to hold illiquid assets.

“It’s not a strategy that we’re really that interested in, and frankly we’d prefer the managers with whom we invest are also not playing in that space. I think we do embrace illiquidity, as long as it’s matched up to the asset strategy; so I don’t see a real need to have 3 to 5 year lockups on long/short equity, but there are strategies that demand illiquidity and we’re fine with that as long as it’s matched up correctly,” said Jonathan Hook, chief investment officer at The Harry and Jeanette Weinberg Foundation, an organization that provides grants to direct service organizations.

Colin Ambrose, chief investment officer at UJA-Federation of New York, a philanthropy organization for the New York Jewish community, agreed that liquidity is more important to retail investors, and thus hedge fund managers can target a different type of audience than they do with their private funds.

“For our portfolio [liquid alts don’t] have a place,” he said. “I think it’s an opportunity for longer-term investors to take advantage of short-duration trading that’s going on in ’40 Act funds that are faced with structural constraints and need to provide daily liquidity. I think it’s more geared toward retail investors, folks who want to have the ability to take capital out quickly. For long-term investors, the idea of daily liquidity in a hedge fund is not something we would want. As long-term investors, we have longer duration trades. Hedge fund managers with a longer time horizon on their investments can take advantage of the short time horizon of ’40 Act investors.”

The two other panelists had similar views that liquid alts are a better fit for retail investors who aren’t able to invest in hedge funds, but for institutional investors who have the means, private funds are more attractive.

“I think there’s a place for liquid alts, especially in a retail arena, where people [who] don’t have the net worth to access hedge funds can access hedge fund beta per se to provide them with a diversified return stream. It gives them liquidity more quickly than a hedge fund, hopefully is a return enhancer or gives uncorrelated returns, and hopefully a risk mitigator within a portfolio—same thing we’re looking for in hedge funds, but I don’t see ourselves ever being big players in the liquid alts space,” said Rob Blandford, president and chief investment officer at Spider Management, an investment advisor that provides investment management services to endowments and foundations, including the University of Richmond. “I view it as trying to buy hedge fund beta, and if you looked at CalPERS portfolio returns versus the Hedge Fund Research Index, they felt it mirrored that index, so that to me is hedge fund beta. Those returns when I looked at them were not that attractive to the fees they were paying, so I get why CalPERS came to that conclusion, along with the scalability of their program. So I’m not sure they’re return enhancers, but I think they can be risk mitigators, provide hedge fund beta and diversify your portfolio for individual investors.”

There can be a use for these vehicles in certain instances, but in some respects they’re at odds with what a hedge fund tries to accomplish.

“I think I have an inherent bias because I don’t think that retail investors or institutional investors should be looking to hedge funds for daily liquidity needs,” said Katherine Molnar, senior investment officer at Fairfax County Retirement Systems. “Having said that, and we haven’t looked at liquid alts at great length, but possibly they could have a place in portfolios as a short-term placeholder if you’re trying to make a change in your manager. I agree with Rob as [liquid alts] being possibly cheaper hedge fund beta, except you’re not paying hedge fund fees. I do wonder if a manager chooses to go that route…I’m not sure what it’s saying for their private funds if they’re effectively willing to do the same strategy with better liquidity and cheaper fees, so I’m not really sure how they’re going to manage both sides of the business.”

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