Learn how liquid alternative funds can help individuals diversify their traditional stock and bond portfolios.

What are liquid alternatives?

Liquid alternatives refer to daily liquid open-end funds, such as mutual funds and ETFs, which invest in across a broad range of alternative investment strategies. Collectively, these types of funds are often referred to as “liquid alts.” Liquid alternative funds manage over $345 billion1 in assets across a diverse range of strategies.

Why invest in liquid alts?

While the universe is broad and diverse, liquid alts are primarily designed to help diversify a traditional stock and bond portfolio and minimize volatility by:

  • Generating returns that have low correlation to traditional assets
  • Limiting the impact of large market downturns

What are alternative investment strategies?

Traditional “buy and hold” – or long-only – mutual fund strategies invest with the expectation to own securities over the long term, regardless of market fluctuations. Alternative strategies, on the other hand, typically take both long and short positions across stocks, bonds and currencies, among other asset classes.

In long/short investing, managers buy securities they expect to appreciate in value and sell short securities they expect to decline in value in order to generate returns regardless of market direction. In addition, they may also use options, futures contracts and other derivatives more extensively than traditional strategies to achieve their investment objectives.

Differences in how most traditional and alternative – or institutional-style – strategies invest matter because they usually target different outcomes.

  • The goal of most traditional strategies is to outperform a benchmark. However, over time their performance is typically closely tied to the performance of the broader markets – both in rising and declining markets.
  • Alternative strategies seek to generate a targeted level of return with lower volatility than a traditional portfolio over time – regardless of how markets perform. For this reason, many alternative strategies are often referred to as absolute return strategies.

What are some examples of alternative strategies?

As noted above, long/short equity investing is one of the most popular alternative strategies and is designed to reduce an investor’s exposure to the broader swings in the market. Other popular strategies are listed below. In addition, many liquid alternative funds in the market today take a multi-strategy approach that combines several strategies in a single fund to achieve their objectives.

Event driven

Seeks to capitalize on price inefficiencies due to corporate events or the maturity/call date of a corporate debt security

Equity hedge

Seeks to buy stocks expected to increase in value and short stocks expected to decline in value to hedge out market exposure

Relative value

Seeks to invest in assets whose value is determined to be more attractive than that of similar assets

Global macro

Seeks to profit from shifting economic expectations or political events by placing directional bets on security or currency prices through futures instruments

Accessing alternative strategies through liquid alts

Many large institutions, such as pension funds and endowments, have invested in alternative strategies for decades through hedge funds. High investment minimums and other restrictions, however, put hedge funds out of reach for most individuals.

With the growth of liquid alts over the last decade, these strategies have become more accessible for individuals. Some key features of liquid alts include:

  • Daily liquidity
  • Transparency into fund holdings and performance
  • Low investment minimums
  • Regulatory oversight

    Registered under the Investment Company Act of 1940

Learn more

Understanding why and how institutions allocate to alternative strategies can provide individuals insight into how to incorporate them into their own portfolios.

Download our white paper to learn more about investing like an institution.

1 Morningstar, as of December 31, 2018.