Understanding Liquid Alternatives
What Are Liquid Alternatives?
Liquid alternatives, often referred to as “liquid alts,” are investment strategies that provide access to hedge fund-like approaches in a more accessible, transparent, and regulated format. Liquid alts have historically offered the added advantages of liquidity and greater risk mitigation than traditional hedge funds.
These strategies are designed to enhance portfolio diversification, reduce volatility, and generate returns that are uncorrelated with traditional asset classes like equities and bonds.
AQR Liquid Alts Roundup
This quarterly report provides a high-level view of the liquid alternatives landscape. It tracks the ten largest funds with at least 5-year track records across eight Morningstar categories, showing AUM, returns, and diversification statistics, such as correlations, performance during equity drawdowns, and how much of a fund’s total returns can be attributed to “alpha.” 1 1 Close Categories included are: Equity Market Neutral, Long-Short Equity, Macro Trading, Multistrategy, Systematic Trend, Commodities, Relative Value Arbitrage and Tactical Allocation. The ten largest funds in each category account for 99.8%, 86.1%, 100.0%, 78.9%, 90.3%, 68.1%, 100.0%, and 66.5% of total category assets, respectively (of funds with at least 5-year track records), except for Relative Value Arbitrage, which includes only six funds total (with 5-year track records). “Alpha” is relative to S&P 500.
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Why Liquid Alternatives Matter
Investors have traditionally relied on stocks and bonds to balance growth and income. However, during periods of high volatility or market downturns, these traditional portfolios may not provide sufficient downside protection or consistent returns. Liquid alternatives offer:
- Diversification: Exposure to different sources of return beyond equities and fixed income.
- Risk Management: Potential to mitigate losses during equity bear markets.
- Low Correlation: Strategies designed to perform independently of broader market trends.
- Liquidity: Unlike private alternatives, liquid alts allow for easier access to capital.
Differences from Traditional Investment Strategies
Traditional investment strategies, including long-only equities and fixed income, provide a foundation for building a diversified portfolio. However, unlike traditional investment strategies, liquid alternatives offer greater flexibility and the potential for returns in various market conditions. Traditional strategies primarily rely on market appreciation and income generation, while liquid alternatives have the ability to profit from both rising and falling markets through techniques like short selling and derivatives trading.
Types of Liquid Alternative Strategies
Explore the most common categories of liquid alternatives:
Long-Short Equity
Long-short equity strategies involve buying stocks expected to outperform (long positions) and shorting ones expected to underperform, allowing managers to express views on both winners and losers in the market. The strategy aims to generate alpha while managing market exposure.
Learn more about Long-Short Equity →
Equity Market Neutral
Equity market neutral strategies aim to isolate stock-specific risk by balancing long and short positions to eliminate market risk. These strategies are ideal for investors seeking returns uncorrelated with broader equity markets.
Learn more about Equity Market Neutral →
Managed Futures
Managed futures strategies, also known as trend following, use quantitative models to go long or short in liquid futures and other instruments. They typically seek to capitalize on sustained market trends across equities, rates, commodities, and currencies.
Learn more about Managed Futures →
Multi-Strategy
Multi-strategy funds combine various alternative investment approaches within a single vehicle to offer broader diversification and less volatile return streams. These funds typically aim to deliver uncorrelated returns with reduced volatility.
Learn more about Multi-Strategy →
Global Macro
Global macro strategies use macroeconomic analysis to take directional positions across global equities, fixed income, currencies, and commodities. These strategies can be discretionary or systematic and are designed to capitalize on global macroeconomic trends and geopolitical developments.
Learn more about Global Macro →
Commodities
Commodity strategies provide direct exposure to physical and financial commodities via futures contracts, including energies, metals, agriculturals, softs, and livestock. These strategies help diversify portfolios and hedge against inflation.
Learn more about Commodities →
Arbitrage
Strategies that capitalize on pricing inefficiencies between related securities. Includes:
- Merger Arbitrage: Involves buying shares of a target company and shorting the acquirer in announced M&A deals.
- Convertible Arbitrage: Takes long positions in convertible bonds while shorting the underlying stock.
- Corporate Event-Driven: Capitalizes on special situations like spin-offs, restructurings, and earnings surprises.
Learn more about Arbitrage Strategies →
Who Should Consider Liquid Alternatives?
Liquid alternatives are suited for a range of investors, from individuals seeking diversification in a traditional 60/40 portfolio to institutions looking to enhance absolute return potential.
Ideal for Investors Who:
- Seek decreased portfolio volatility.
- Want uncorrelated return streams.
- Are concerned about inflation or rising interest rates.
- Desire hedge fund-like exposure with daily liquidity.
Integrating Liquid Alternatives Into a Portfolio
There is no one-size-fits-all allocation. Common approaches include:
- Satellite Allocation: Use as a complement to traditional core holdings.
- Diversification Tool: Allocate across several liquid alt strategies to improve portfolio robustness.
- Risk Mitigation: Add to reduce overall portfolio drawdown during stressed markets.
Explore Our Strategies
Ready to dive deeper? Learn more about each strategy to explore how liquid alternatives may be able to play a role in your investment strategy.
DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus or summary prospectus containing this and other important information, please call 1-866-290-2688 or click here to view or download a prospectus online. Read the prospectus carefully before you invest.
The information contained on this website has been provided solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. The information on this site is directed only at persons or entities in any jurisdiction or country where such access to information contained on this website and use of such information is not contrary to local law or regulation. Accordingly, all persons who access this website are required to inform themselves of and to comply with any such restrictions. Past performance is not a guarantee of future performance.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
Diversification does not eliminate the risk of experiencing investment losses. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
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