How Liquid are Liquid Alternatives?

New York ( – Liquid alternative mutual funds have seen explosive growth over the last five years and with good reason. The idea behind liquid alts is to offer the benefits of hedge fund strategies while eliminating some of the issues inherent in hedge funds such as the lack of liquidity and high minimum investments. These qualities resonated with investors and the assets under management (AUM) in liquid alts have more than quadrupled since 2009. Obviously part of this can be attributed to the strong bull market that has taken place since the market hit bottom in March 2009, but in 2014, liquid alts saw a net inflow of $39 billion and that was after attracting $96 billion in 2013. The growth rate has slowed somewhat in 2015.

Liquid alts are not without their own issues. Like hedge funds, there is little to no transparency and not all liquid alts are as liquid as they should be. What do we mean by that? The potential issue lies in the holdings within the portfolios. Some prominent firms hold distressed debt, mortgages, high yield bonds and other not-so-liquid debt instruments in the portfolios of their funds. Under normal conditions and normal liquidation demands, holding the illiquid investments shouldn’t be an issue, but what happens if we see the credit market lock up again like it did in late 2007? How easily do you think the illiquid debt instruments can be unloaded and how much will they have to discount them in a panicked market?

Sure the bulk of the portfolio may be made up of stocks, treasuries, ETFs and the like which are all very liquid. However, if there is a 1987-type crash or another situation like what happened after the attacks of September 11, 2001 where the market is closed for a week and then reopens to uncertainty, will these liquid alts be able to meet redemption requests just by selling the more liquid assets?

In a situation such as described above, the first investments to be sold will be the most liquid, but then what happens? While the funds meet all of the requirements of the Investment Company Act of 1940, they could have up to 15% of their assets invested in illiquid assets. In a hysterical market how much of a downward adjustment will those illiquid assets take in value? How much of a hit will the fund’s net asset value take?

These illiquid asset issues are not an issue with the HedgeCoVest models. All of the investments held in the portfolios are highly liquid and the platform itself gives investors more liquidity than liquid alts do with the ability to liquidate on an intraday basis. Under normal circumstances having intraday liquidity doesn’t seem like a big deal. However, in an abnormal circumstance or a hysterical market environment, intraday liquidity can make a huge difference in both performance and peace of mind for investors.

This entry was posted in HedgeCoVest News and tagged , , , , , , . Bookmark the permalink.

Leave a Reply