New York (HedgeCo.Net) The liquid alternative industry has experienced tremendous growth over the last seven years, with assets under management going from $100 billion to $440 billion during this time period. As impressive as the growth has been, the alternative funds that act more like hedge funds than traditional mutual funds have not made their way in to many 401(k) offerings. John McCormick, a senior managing director at Blackstone Group LP, is out to change that.
Blackstone and other managers are looking to change the tax-deferred retirement savings plan offerings by getting plan operators to include liquid alts in the choices offered to investors. If successful, this would give the industry access to the $4.4 trillion pool that currently resides in 401(k)’s.
In a recent article from Reuters, McCormick stated that “Any investor who wants access to alternative strategies should have access to them,” as long as they are suitable for the investor and properly explained, McCormick said in an interview.
Critics of liquid alts cite high fees and complicated strategies as the reasons for not including the funds in 401(k)’s. Proponents of the funds point to their diversification and the potential to protect against a downside move as reasons they should be offered in retirement plans.
One of the reasons for the growth in liquid alts and why Blackstone and the other managers are pushing for inclusion can be tied back to the bear market from 2007-2009. “You have baby boomers nearing retirement who experienced a scary event in 2008. People who thought they had diversification and didn’t really have it. The long lists of assets liquid alt funds hold are designed to provide that diversification,” McCormick stated.
Carlos Melville is a chief spokesman for Columbia Management, another operator of liquid alt funds that has joint offerings with Blackstone. Melville stated, “We believe that alternative investments can complement a client’s traditional equity and bond allocations by offering the potential for diversification, stability and positive expected returns over a complete market cycle.”
While 401(k) administrators may be balking at offering liquid alts at this time, you can bet the liquid alt managers will make progress once the next bearish phase hits the market. Like we have pointed out on numerous occasions, hedge funds and liquid alts may have underperformed during the prolonged bullish phase. However, if we see another sharp decline like the one we saw seven years ago, these alternative strategies should produce superior returns and should offer investors better downside protection. When it comes to their retirement money, that seems to be the most important thing—downside protection.