Key takeaways from an interview with Morningstar’s Francesco Paganelli, European expert for liquid alternatives.

Lukas Strobl, editorial manager for EMEA at Morningstar, interviews Francesco Paganelli. The topic: Liquid alternatives as a “hedge fund-lite” kind of strategy.

Francesco Paganelli:

• Alternative funds are those that primarily attempt to modify, diversify, expand, or even eliminate the dominant risk factors that typically drive traditional asset classes.
• Within alternatives, the liquid alternative space comprises a diverse range of strategies that can zig when the market zags by employing different techniques.
• Examples: shorting, exotic instruments, non-correlation, relative value, and systematic trend – strategies generally used by hedge funds, or – “hedge fund-lite”
• Why “liquid?” – these are alternative strategies offered in a mutual fund wrapper with daily liquidity – a way for anyone to access sophisticated strategies
• Liquid alternatives are a Global Financial Crisis phenomenon
• Investors sought a solution to diversify their portfolio amidst the 2008 meltdown
• What is the right fund or strategy for you? That depends on your goals, preferences, skill set, and risk appetite. But liquid alternatives may not be for everyone
• Risk: A portfolio can be seen as a collection of risk exposures that interact with each other and what’s really critical is to determine what risk you have and decide which ones you want to keep, which ones you want to mitigate, which ones you want to diversify away from? That should help selection of the fund or strategy.
• [2022] Best performing strategy of the year so far: Systematic trend, which can be described as going long markets that are rising in price and going short markets that are falling in price. (Booming commodity prices and meltdown in the bond market).
• What to watch for: Complexity, leverage, steep fees, and therefore, the crucial selection of a manager.

Related Story: Liquid Alternatives: Three Reasons