This past week I had two great opportunities to participate in live conversations with the broader investment community. The first was a speaking role a the IMN Western Non-Traded REIT & Retail Alternative Investment Symposium in Dana Point, CA. I spoke on a panel with two other excellent panelists, one of which was an advisor and the other a due diligence / alternative investment research specialist. One key takeaway as that advisors need more education around alternatives. That doesn’t mean that advisors won’t use alternative products, it’s just that they will limit their use until they better understand how they work, and more importantly, how to easily explain them to clients.
The second opportunity this past week was to participate on the weekly Alpha Call hosted by AdvisorShares and moderated by Roger Nusbaum. Also participating on the call were Dick Pfister and Jonathan Belanger of AlphaCore Capital, an advisory firm that has a view that alternatives should be at the core of a portfolio (and also a big user of liquid alternatives). Jonathan, the Director of Research for AlphaCore, made an important point on the call, and that is that one common mistake made by investors who use alternatives is that they often end up building a portfolio that has much lower volatility versus what they might desire.
With this low volatility can also come low, single digit returns. For many, this can be disappointing, especially if that wasn’t the intention. Jonathan’s important takeaway was that investors need to pay attention to the risk side and be willing to take more risk with your alternative managers if you want to maintain your higher expectations for returns. Let low correlations work for you on the diversification side, but don’t loose focus on the return objectives side of the equation when building an alternatives allocation.
Thank you to both IMN and AdvisorShares for inviting me to participate in their events.
One piece of data I prepared for the two engagements was a look at the flows into and out of liquid alternatives, which are heavily concentrated in several categories. Total flows into liquid alternatives (alternative mutual funds and ETFs) over the past 12 months, as reported by Morningstar, have been $13.3 billion. But digging deeper, a different picture emerges:
Only three categories have had any significant inflows: Multi-Alternatives, Managed Futures and Volatility (the flows to the Volatility category look small, but on a growth rate basis are actually significant), while Long/Short Equity, Market Neutral and Non-Traditional Bonds have all seen heavy outflows. What that tells me is that advisors are looking for either a one-stop allocation to alternatives (Multi-Alternatives), or more straight-up diversification (Managed Futures). The notion of reducing equity or fixed income risk isn’t playing out in the flow numbers.
Growth rates tell a similar story, but the leaders and laggers differ a bit. Managed futures have seen the highest growth rate over the past 12-months, while Bear Market and Market Neutral funds have been the laggers:
If you haven’t yet registered for ALTSLA 2016, then you should do so now. The early bird deadline expires on December 15 and we are expecting another sold out conference. LA is beautiful in March, and participating in a high-impact, one day educational conference focused on alternative investments makes it even better.
10 Weekend Reads
- New Paths to More Consistent Equity Alpha (AB Blog)
- Hedge Fund Woes Can’t Diminish Banner Year for Long-Short Trades (Bloomberg Business)
- There is a limit (The Reformed Broker)
- Hedge Fund Spotlight (Preqin)
- The Costs of Active Management (Morningstar)
- Top Five Articles from November: (Un)Passive Management, the TPP, and Inflation (Enterprising Investor)
- Considering commodities? Think materials instead (Wells Fargo Blog)
- Generating Alpha in Emerging Markets Debt: Should Investors Take a Permanent or a Tactical Allocation Approach? (MFS Blog)
- Hacking a Hedge Fund (Chief Investment Officer)
- The Scariest Navy SEAL Imaginable…And What He Taught Me (Tim Ferriss Podcast)