The next generation of liquid alternative products should focus on what asset allocators need in their portfolios, according to a report from alternative investment manager Beachhead Capital Management.
Generation Two Liquid Alternatives: Built to Meet the Needs of Asset Allocators, addresses two key questions for investors today – why were many investors disappointed with the first generation of liquid alternative mutual funds, and what better solutions are available going forward?
The report says that liquid alternative products created in the wake of the financial crisis (Generation One) often had three issues: poor performance, high fees and/or highly unpredictable performance. With short track records, the funds too often were sold on unrealistic expectations and marketing hype. Diversification strategies that served institutional investors well broke down when translated to retail portfolios.
According to the report, the next generation of products should focus on that fact that asset allocators need products that can match or outperform long-term capital markets assumptions for hedge funds, deliver consistent performance relative to the “bucket,” and keep fees low and expenses low.
Andrew Beer (pictured), managing partner at Beachhead Capital Management, says: “Early adopters of liquid alternative products tended to ‘chase the hot dot’ – a huge problem when yesterday’s winners might underperform tomorrow’s by 30 per cent or more. Today, allocators understand that consistency and predictability over a market cycle are essential to reach long-term goals, and that low fees are the surest path to capital appreciation. The next generation of liquid alternatives, which we call Generation Two, will focus on outcomes and be built for the needs of allocators.“
The report predicts that allocators will drive a resurgence of hedge fund replication – which offers a proven combination of performance, cost and consistent results, as well as being suited for the constraints of regulated mutual funds, UCITS funds and ETFs.