The Benefits of the Liquid Alternatives Boom

Justin Frankel is a good friend of mine and he’s a New York City-based portfolio manager at RiverPark. In response to my post this week about “liquid alternatives”, he put the following up at his Tumblr and I asked him if I could run it here. Because we’ve lost track of which one of us owes the other a beer, he said yes. 

I think the below offers some balance to the liquid alts discussion. I also have a feeling you’ll be hearing and seeing a lot more from Justin in the future, as an up and coming player in the space. – JB

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Liquid Alternatives – Leveling the Playing Field for Investors

Liquid Alternatives offer investors creative solutions to their asset allocation and diversification needs.Yesterday, my buddy Josh wrote an informative piece about these types of investments, specifically one strategy that has failed to deliver on its goals. I encourage you to read it here:

Brokers, Liquid Alts and the Fund That Never Goes Up

While important considerations relating to the cost and complexity of some of these strategies have been raised in the financial media, liquid alternatives are becoming a more prevalent and important tool in the investors’ tool box, giving everyone access to top quality investment ideas that were once only available to a select group of accredited investors.

The Wall Street machine has a long history of favoring institutions over individuals, and the ultra-high net worth over the mass affluent. After all, finance is a service industry, and it is those larger clients that pay the lion’s share of fees.

Liquid Alternatives are simply hedge fund strategies wrapped in a mutual fund format that conforms to the Investment Company Act of 1940. The category includes 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, cushion portfolios against downside risks, and improve risk-adjusted returns.

Individual investors have become more sophisticated consumers of financial products. Liquid Alternatives are not just a democratization of the alternative investing landscape. They represent 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 greater disclosure, increased transparency, and more liquidity.

Alternatives have moved beyond the closed partnership structure and into the mutual fund space. By doing so, they 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 the successful and widespread adoption of these investments. The good news is that virtually all the data necessary to properly evaluate the strategies and their managers is widely available from trusted public and third-party sources.

When used correctly, Liquid Alternatives can be powerful portfolio enhancers.

– Justin L. Frankel

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