What is Liquid Alternatives?

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Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. These products' selling point is that they are liquid, meaning that they can be bought and sold daily, unlike traditional alternatives which offer monthly or quarterly liquidity. They come with lower minimum investments than the typical hedge fund, and investors don't have to pass net-worth or income requirements to invest.Critics argue that the liquidity of so-called liquid alts will not hold up in more trying market conditions; most of the capital invested in liquid alts has entered the market during the post-financial crisis bull market. Critics also contend that the fees for liquid alternatives are too high. For proponents, though, liquid alts are a valuable innovation because they make the strategies employed by hedge funds accessible to retail investors.

Definition

Liquid alternatives (or liquid alts) refer to mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside risk protection through alternative investment strategies. The key selling point of these products is their liquidity, meaning they can be bought and sold daily, unlike traditional alternatives that offer liquidity monthly or quarterly. They have lower minimum investment requirements than typical hedge funds, and investors do not need to meet net worth or income requirements to invest.

Origin

The concept of liquid alternatives emerged after the 2008 financial crisis. Investors were dissatisfied with the high barriers and low liquidity of traditional hedge funds, leading to the development of liquid alternatives. These products aim to offer the benefits of hedge fund strategies while maintaining higher liquidity and lower investment thresholds.

Categories and Features

Liquid alternatives can be categorized into various types, including market-neutral funds, event-driven funds, and global macro funds. Market-neutral funds aim for stable returns by hedging market risks; event-driven funds focus on corporate events like mergers and acquisitions; global macro funds invest based on macroeconomic trends. The main features of liquid alternatives are high liquidity, low investment thresholds, and diversified strategies.

Case Studies

A typical case is the AQR Multi-Strategy Alternative Fund launched by AQR Capital Management, which achieves risk diversification through a combination of multiple strategies. Another example is BlackRock's Global Diversified Alternative Fund, which focuses on diversified investment strategies across global markets. These funds attract a large number of retail investors by offering liquid versions of hedge fund strategies.

Common Issues

Investors often worry about the liquidity of liquid alternatives during market turmoil. Additionally, high fees are a common criticism. Investors should carefully assess the fee structures and liquidity risks of these products to ensure their investment goals are met.

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