There is a spike in inflows into liquid alts funds during 2022.

According to a 2019 study by Greenwich Associates, liquid alts then had a market share of 4% among institutional investors, ranging from a high of 6% among public pension funds to a low of 2% among corporate programs and outsourced CIOs in the U.S. However, institutional investment has doubled since then, the consulting firm has estimated. Looking for an investment of a different kind, retail investors have also piled into liquid alternatives.

Investors are becoming more accepting of liquid alternatives, which are not correlated to stocks and bonds. After the 2008 financial crisis, they became popular with retail investors, but asset allocators, who run their own alternative strategies, were less receptive.

Liquid alts, which were first known as hedge funds for the masses, have become more appealing to both retail and institutional investors, mainly because both stocks and bonds (the fabled 60/40 portfolio) have performed poorly.

Liquid alts: Sea change in fund flows

According to research group Morningstar, investments have been pouring into liquid alt mutual and exchange-traded funds. Between 2015 and 2020, liquid alts funds suffered continual withdrawals and notably, there was a massive spike in 2020 of $3.2 billion.

There was a sea change through the first half of this year, however, and the sector gathered $23.3 billion in net inflows, exceeding the $18.4. billion from the same period in 2021.

How are liquid alternatives doing?

A study by Goldman Sachs Asset Management observed that in the 2020’s first quarter when the pandemic swept the world, liquid alts declined just 9%, while the S&P 500 tumbled 20%.

The top liquid alts funds today are futures-oriented, employing a strategy known as systemic trend.

AQR Managed Futures Strategy HV 1, which has gained 50% through July 20, per Morningstar, is the 2022 performance leader. The fund invests in 100 futures and forward contracts around the world using a mix of equities, fixed income, currencies, and commodities.

Historically, the nine-year-old fund did not generate a good return record during the huge bull market that came to an end in 2021. The fund lost 2% last year and 0.65% the year before. However, the fund excelled in 2022 riding on the back of macroeconomic and geopolitical turmoil.

The Arrow Managed Futures Strategy A and Guidepath Managed Futures Strategy Institutional are second and third in the pecking order of returns, up by 44% and 39% respectively.

Nevertheless, this year has been tough on account of asset volatility, for example, commodities, which have come off their recent highs. The AQR fund, which aims to succeed in both good and bad markets, employs a shorting strategy during bearish times.

However, some of these strategy-type funds (for example long/short funds) haven’t done too well and are down 9.4% this year, according to Morningstar. This shows that “some of these strategy types still carry some equity market risk,” according to analyst Bobby Blue.

Related Story: Alternative Investments Pick Up As The 60/40 Mantra Fades