Liquid Alternatives: A Step in the Right Direction

January 8, 2015, New York (HedgeCo.Net)—There is a lot being written and said about “40-Act Funds” right now. You may also hear them called alternative mutual funds or liquid alts. The name ’40 Act Funds is a reference to the Investment Company Act of 1940 which laid the ground work for mutual funds, exchange traded funds, closed end funds and unit investment trusts to be established.

In the hedge fund industry, ’40 Act Funds is the jargon used to describe an alternative fund that is registered as an investment company and doesn’t really differentiate whether it is an open-ended fund, closed-ended fund or an ETF. If it uses hedge fund strategies such as selling short, using leverage or hedging, the industry will call it a ’40 Act Fund or a liquid alt.

The liquid alt industry has seen tremendous growth over the last decade. The assets under management have increased nearly ten-fold, jumping from $33 billion to $308 billion, since 2005 and experts predict that the industry could grow to over $600 billion by 2017.



The popularity and growth in the industry is attributable to several factors. First, liquid alts address several of the negative connotations of hedge funds. In a recent article on, a survey of over 300 financial advisors showed that the three biggest reasons why they didn’t use hedge funds were: high fees, lack of liquidity and lack of transparency. Liquid alts address the “high fees” issue and they address the “lack of liquidity” issue.

The standard fee structure in the hedge fund industry is a 2% management fee and then a 20% incentive fee based on the returns produced. According to an article on Fox Business news from July, the average expense ratio for liquid alts is 1.84%, considerably lower than the fees charged by traditional hedge funds.

The other big concern that liquid alts address is the lack of liquidity. Most hedge funds have monthly or quarterly redemption setups. This means that if you would like to get your money out of a hedge fund, it is likely going to be at least a month before you can do so. There are also a small percentage of hedge funds that have a lockup period of a certain length of time, usually a year or two. A lockup period means that you can’t get out of the fund at all for a certain period and you may have to pay a fee if you do.

With liquid alts, you have end-of-day liquidity like you have with traditional mutual funds, so they are a drastic improvement over the hedge fund liquidity dilemma. There aren’t any issues with lockup periods either.

Of the issues listed earlier regarding why financial advisors don’t use hedge funds, the only one liquid alts don’t address is the lack of transparency. Yes liquid alts fall under the mutual fund requirements and have to provide a quarterly report to a shareholder that outlines the fund’s holdings. The problem is that these are actively traded funds and what is held from day to day could change drastically.

The transparency provided by liquid alts is a little better than hedge funds as traditional hedge funds don’t have to report their holdings at all. In fact, hedge funds have often been very secretive about what investments they were making, even to the investors of the fund. Talk about the ultimate lack of transparency. However, HedgeCo with the development of HedgeCoVest has developed the perfect new platform to address these concerns.

The best thing about HedgeCoVest is that it addresses the high fees, the lack of liquidity and the lack of transparency. The fee is a little higher than the average expense ratio for liquid alts, but it is still much lower than the traditional hedge fund fee arrangement.

While liquid alts do a good job of addressing the lack of liquidity issue faced by hedge fund investors, HedgeCoVest takes it a step further and gives investors immediate liquidity throughout the trading day.

HedgeCoVest also addresses the lack of transparency issue faced by hedge funds and liquid alts. You can long into your account and see what investments are in the portfolio at any given time. You are replicating the hedge fund strategies, but it is your own separately held private account.

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