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Investor Demand for Liquid Alts Drying up

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Stockholm (HedgeNordic) – Alternative mutual funds have increasingly been struggling to find backers in recent years, as investor demand for the mutual fund version of hedge funds has declined markedly in the past four years.

According to a  Financial Times article, Morningstar data shows that the net sales of alternative mutual funds in the United States declined from $53 billion in 2013 to a significantly smaller figure of $6 billion in 2017. In addition, investors pulled out more than $3.7 billion from alternative mutual funds, also known as liquid alts, in the second quarter of 2018 after investing $6.5 billion in the first three months of the year. Net sales of alternative UCITS funds in Europe, meanwhile, declined by one-third in 2017 compared to the 2015 figure. The first quarter of 2018 saw the lowest level of net sales for these vehicles in Europe in five quarters.

Liquid alternatives constitute a broad category that includes several strategies such as managed futures, market-neutral, long-short equity, and multi-asset, among others. One of the benefits offered by liquid alts in comparison to most traditional hedge funds is daily liquidity, which provides investors with the possibility to invest in vehicles exhibiting low correlations to traditional asset classes while maintaining the ability to pull capital out at short notice. One criticism of increased liquidity, though, stems from the so-called “illiquidity premium,” which refers to the perceived advantage that traditional hedge funds can invest in longer-duration assets with an enhanced return profile thanks to their ability to lock up capital for a longer period.

Cited by Financial Times, Troy Gayeski, a partner at alternative investment firm SkyBridge Capital, said many investors have been snubbing liquid alternatives in favor of traditional hedge funds. “The main issue with liquid alts is you are trying to put a square peg in a round hole. You can push liquidity only so far for a hedge fund strategy before they lose their ability to generate alpha,” Gayeski said. “Liquid alts won’t go away entirely but its growth period is clearly over. It’s share of the pie should not go up over time,” he added.

Tayfun Icten, a senior manager research analyst at Morningstar covering alternative investing strategies, told Financial Times that there was a small increase in sales of alternative mutual funds in the United States at the beginning of 2018, but the rise was “nothing to write home about”. He said that alternative mutual funds had enjoyed solid investor demand until 2014, but investors have been disappointed with returns since then. “This is the perfect time for investors to expect good returns from alternatives but managed futures, long-short equities and equity market-neutral have not delivered the returns you would expect,” Icten said. “2018 has been disappointing in the liquid alternative space.”

Picture: (C) By-Imfoto—shutterstock.com

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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