Investing products designed to bring hedge-fund strategies to the masses are on course for one of their best months in more than a decade, as the latest research argues the oft-maligned trades have robust foundations.
So-called liquid alternatives mimic the fast money through short selling, leverage and derivatives in order to capture popular sources of market returns known as risk premia. Yet they have underperformed both hedge funds and 60/40 portfolios over the past decade—and look set to do so again this year.
But as the pandemic roller coaster continues, a gauge tracking hedge-fund clones is up 2.3% in November to the highest in nine months. That follows its outperformance in the March maelstrom and the biggest jump in the index’s 13-year history a month later in the global market rebound.
The rally comes as a study shows these public instruments can successfully replicate trades beloved by the most sophisticated institutional managers — with much lower fees.
In a paper published last month, researchers from the National University of Singapore found liquid alternatives had broadly matched hedge-fund returns, including stock market beta and factors like value and momentum. Their relative strength during the coronavirus slump shows it’s “probably premature” to dismiss replication strategies, they said.
“We see value in the hedge fund strategy clones constructed in this study, with most of them outperforming their respective region’s market benchmarks during the Covid-19 crisis,” wrote authors Joseph Cherian, Christine Kon and Ziyun Li.
The HFRI-I Liquid Alternative UCITS Index fell 5.6% in March, compared with a 5.9% drop for a global hedge-fund gauge and 12.5% slump for the S&P 500.
However, while liquid alternatives have a track record of outperformance during major sell-offs, in the long term they have struggled to keep pace with hedge funds and have badly lagged the U.S. equity benchmark.
For all the performance worries, Greenwich Associates estimated there were some $882 billion of institutional assets invested in the sector as of the end of last year. Exchange-traded funds following the strategies hold record assets and have lured cash every month since March, Bloomberg data show.
Liquid alternatives are a “good place to park you money while you wait for a better investment opportunity,” said Olivier d’Assier, head of applied research for Asia-Pacific at Qontigo. However, the “window appears to have closed now with optimism rising again thanks to news on upcoming vaccine and the result of the U.S. election,” he said.
The liquid alternatives label is used for an array of structures and styles, and within that performance can vary significantly. The NUS researchers found that, during the Covid crash, the clones had an advantage over arbitrage, CTA/managed futures, macro, multi-strategy and event-driven funds in North America, and in long-short equity in Asia.
This article was provided by Bloomberg News.
