Though liquid alternatives mostly delivered on their promises during the recent meltdowns of the GFC and the pandemic, they still face challenges.

Blueprint Investment Partners have issued a report analyzing the performance of liquid alternatives across major market drawdowns, given the fact that demand for these products has materialized into a 300% increase in U.S. liquid alternative mutual fund and ETF assets since Q3’07. The report finds that despite their perceived success, liquid alts face challenges such as high expenses, tracking error and clients’ propensity to exit these strategies in the face of bull markets. (Blueprint Investment Partners)

Liquid alts: Key investment rationales and current challenges

Advisors and investors sought refuge in liquid alternatives after the great financial crisis (GFC). The reasons included uncorrelated returns, lower drawdowns, better risk-adjusted returns, liquidity and better transparency compared to private market investments.

Blueprint studied what happened to liquid alts during the period April 2009 through March 2021, – which included the effect of both GFC and the coronacrash events.

“As you can see, there is great variety when it comes to investments classified as liquid alts, but most of these sub-indexes achieved the desired portfolio benefits outlined in the Executive Summary when compared against traditional asset classes,” the report found.

But challenges persist

Blueprint say that liquid alternatives still get bogged down due to high expenses and the “significant tracking error” relative to investor expectations and underlying indices.

Another problem is the difficulty that advisors have in getting clients to “sit with” the strategies during bull markets.

Blueprint’s alternative to liquid alternatives

Blueprint propose the Blueprint Tactical Growth Strategy as an alternative to liquid alts.

The strategy works with eight familiar asset classes:

• S. equities
• Foreign developed equities
• Emerging market equities
• Real estate
• S. Treasury bonds
• International Treasury bonds
• Inflation-protected bonds
• Alternatives

The strategy also has a maximum combined expense ratio and management fee of 57 basis points. “We maintain daily liquidity, make systematic asset allocation decisions monthly, and are wholly transparent about our decision making,” say Blueprint.

Testing, Blueprint compared two portfolios – both allocate 50% to stocks and 30% to bonds, but they differ in that one contains a 20% allocation to the Blueprint Tactical Growth model (“the alternative”) and the second contains a 20% allocation to a hedge multi-strategy, namely IQ Hedge Multi-Strategy Tracker ETF (QAI) (“the liquid alt”).

Here are the results:

Blueprint conclude that The Blueprint Tactical Growth Strategy demonstrates common attributes to liquid alternatives, including similar market correlation and drawdown profiles, but has achieved greater risk-adjusted returns at a reduced cost.

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