New York (HedgeCo.Net) In last week’s newsletter we featured a story on liquid alts and how they may not be as liquid as investors think due to the illiquid assets they may be holding. Another aspect of liquidity has to do with perceived liquidity. What is meant by that is that an investor may have the right to sell an alternative mutual fund at any time, but are they willing to sell at any time?

If you are the investor and you have just purchased an alternative mutual fund and paid an up-front sales load and then the market and the fund tanks, are you going to be willing to sell that fund immediately or are you going to try to stick it out because of the up-front fee you just paid? According to the Yahoo! Finance mutual fund screener, the average maximum up-front sales load for absolute return funds is 5.35%. That is a hefty fee that is going to add to your losses if you have to sell. What if the fund is down 10% in the first few months after you bought it, would you be willing to take the loss and the additional hit from the sales load?

There is also a perception of liquidity with traditional mutual funds as well. Most funds have to have a certain percentage of assets invested according to their bylaws. If the market is in a free fall and the fund manager has to be fully invested, how do they protect the downside? They can’t go to cash and they can’t take short positions or buy protective put options. The bylaws of the fund handcuff the manager and when the market is heading straight down like we saw in the fall of 2008, it is a dangerous situation. Sure investors can sell their funds, but if the fund is down 25 or 30%, you have the right to sell, but will they be willing to sell?

Comedian Ron White has a part of his skit where he talks about being arrested. He says, he had the right to remain silent, but he didn’t have the ability. The same question can be asked of mutual fund investors. You may have the right to sell at any time, but do you have the ability?

These liquidity issues and fee issues are concerns HedgeCoVest investors do not have to deal with. The fee for the platform is a flat 2.5% annually and investors have the ability to liquidate at any time. There aren’t any up-front fees and the models have the ability to short stocks, move to cash to protect assets and most can use put options to protect the portfolio from a pullback. And because investors have the transparency to see the holdings in their separately managed account, they will know if their portfolio is protected and they will know how much exposure to the market they have.

Rick Pendergraft
Research Analyst
HedgeCoVest