Do Liquid Alternatives Work?


October 2018 wasn’t a great month for equities. The S&P 500 recorded a 1-month loss of 6.84% as volatility made a substantial resurgence, the likes of which we haven’t seen in nearly a decade.

Whether the volatility continues, or we see a sharp rebound to the previous trajectory of growth we’ve become accustomed to, the period of uncertainty has shed light on our vulnerability to market cycles.

We thought this was a good time to review the practical use of liquid alternatives in an investment portfolio (also called Diversifiers).

So we’ve posed the question, “Do liquid alternatives work?”

What is a Liquid Alternative?

Liquid alternatives are alternative investment strategies that provide portfolio diversification and downside risk protection. Unlike traditional alternatives, liquid alternatives can be bought and sold daily. Examples of liquid alternative strategies include:

  • Long-Short Equity
  • Managed Futures
  • Market Neutral
  • Multialternatives
  • Nontraditional Bonds

Liquid alternatives have been heavily criticized due to lackluster performance. However, the strong and sustained growth in equities may not be the best environment to gauge the value of liquid alternatives in a diversified investment portfolio. Volatility, on the other hand, is the perfect time to evaluate whether liquid alternatives can provide downside protection to investors.

See below a chart highlighting a list of liquid alternative (Diversifier) strategies available through the ftj | FundChoice platform. We’ve compiled strategy performances for the month of October, and compared them to the performance of relevant benchmarks, most notably the Vanguard 100% Equity Model.

Liquid Alternative Performance

Fund Name 

Ticker 

% Return – 1 Month 

% Return - YTD 

Blackstone Alternative Multi-Strategy 

BXMIX 

-1.57 

-0.47 

Litman Gregory Masters Alternative Strategy 

MASFX 

-1.55 

-0.81 

Loomis Sayles Strategic Alpha 

LASYX 

-0.10 

1.76 

The Merger Fund Institutional Class 

MERIX 

-0.30 

5.30 

Osterweis Strategic Income 

OSTIX 

-1.23 

1.43 

PIMCO Income 

PIMIX 

-0.12 

-0.79 

Toews Tactical Income Fund 

THHYX 

-1.15 

-0.96 

Vanguard Market Neutral 

VMNFX 

0.75 

3.92 

William Blair Macro Strategy 

WMCIX 

1.57 

-2.27 

 

Benchmark 

% Return – 1 Month 

% Return - YTD 

Vanguard 100% Equity Model  

-7.69 

-3.06 

Bloomberg Barclays US Aggregate Bond 

-0.79 

-2.38 

 

Performance data over the last month, where we’ve seen an unusual uptick in volatility, shows that liquid alternatives may in fact deliver the desired downside protection to client investment portfolios.

While 30 days is not a complete investment cycle, a period like we just experienced heightens our belief that diversification from market movement is essential to balancing an investor’s portfolio.

When cycles do last more than a month, advisors and their clients seeking diversification might find liquid alternatives to be of great value, both to their emotional and financial health.  

To help advisors build well-diversified client portfolios, we enable the inclusion of dedicated Tactical Beta and Diversifier strategies through our unique investment process, Market Movement Strategies. Learn more about the three-mandate approach today.

 

Source: Morningstar.com


The performance data above was selected to illustrate benefits of diversification. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument.  There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss.  This information is not investment advice and prepared for general information only.

1153 - FTJFC - 11/9/2018