The market for liquid alternatives continues to grow and adapt. On St. Valentine’s Day of this year, ABR Dynamic Funds announced that it was launching its first Irish-domiciled UCITS V fund.
Maybe it should have waited until St. Patrick’s Day?
At any rate, the fund “seeks U.S. participation in a bull market and significant, positive returns in a crisis,” and it is distributed by OpenFunds Investment Services AG, of Zurich, Switzerland.
ABR Dynamic itself, headquartered in New York, is a subsidiary of ABR Management, a research-focused trading group. According to its website, ABR Dynamic’s business plan is “to create indices and liquid alternative solutions for clients” with intellectual property licensed from the parent company.
Liquid Alternatives
This news on ABR’s move might encourage a new look at a September 2015 paper on “The Role of Liquid Alternatives in Wealth Management” from Mercer LLC.
Though the paper was not long (merely 8 pages), Mercer concisely explained the investment case for investment in alternatives in general and the current liquid alternatives landscape, and then offered “a sample framework of how to allocate to alternatives.”
Skipping the first of those (as covering ground presumably familiar to readers of this blog), Mercer’s take on the landscape begins with the observation that “the sheer number of funds now available presents an opportunity but also a challenge in identifying the most talented managers and best-suited funds to complement an investor’s traditional asset portfolio.”
When a hedge fund manager launches a mutual fund specifically to bring its strategies to that more liquid domain, it will “generally have verifiable track records” for the strategies involved and that will provide at least a starting point for the due diligence efforts of potential investors in the mutual fund (or UCITs). But traditional asset managers launching a fund using alternatives strategies present a different situation.
Mercer expects that the number of liquid alts vehicles will continue to grow over time. Trading strategies and long-short equity strategies in particular involve underlying instruments that are liquid, so these are the areas where hedge fund managers find it easiest to expand into the more liquid space. As it happens, managers in that situation for the most part report that they don’t lose customers from the hedge funds. They gain new investors for these new funds. So they aren’t simply shifting business around, as Coca-Cola did when it killed off Diet Coke with Coke Zero. No, the new product is receiving new inflows.
This brings Mercer to what it calls the “how of alternatives.”
Portfolio Construction
The framework in question takes the form of a box with three columns representing the three goals of alternatives (growth, diversification and inflation protection) and five rows, representing different levels of liquidity based on strategy and underlying instruments. The below is an adaptation of the box found in Mercer’s report.
| Growth | Diversification | Inflation Protection |
| Core multi-asset | Idiosyncratic multi-asset trading strategies (fundamental macro/ managed futures/ active currency) | Liquid Real Assets (REITs/ natural resource equity/ commodities)TIPS |
| Directional long/short equityDirectional long/short creditActivist | Long/short equityLong/short creditEquity market neutral | Directional long/short commodities |
| Event-driveDistressedMulti-strategy | Core real estate | |
| Mezzanine debt secondaries | ||
| Buy-outsDistressed for controlGrowth equity
Venture capital |
InfrastructureEnergyPE
Timber Agricultural Non-core real estate |
Source, Mercer, “The Role of Liquid Alternatives in Wealth Management, p. 5.
The top two rows in this bow represent liquid alternatives.
Conclusions
Mercer cautions that if an investor uses this framework in thinking about his portfolio, he should be aware that “vastly different risk/reward profiles may exist within each alternative strategy highlighted ….Thorough due diligence is necessary to understand these varying risk/reward profiles.”
As of the time of the publication of Mercer’s report, (a year and a half ago) investors had about 900 mutual funds with alternatives strategies whence to choose. Mercer closed with the rather mildly worded advisory that an allocation to one or more of them “warrants consideration.”
In an appendix, Mercer answers some frequently asked questions. One of these reads, “will the ‘best’ investment talent work only for traditional hedge funds, and not for liquid alternatives?” Mercer assures readers that the answer is “no,” that concerns regarding talent are “ultimately unfounded.”