Morningstar Magazine - February/March 2018 - 8

Dispatches

The Difficult Case for
Liquid Alternatives
Costly and complex, they
still have a role to play.

Phillips Curve
11

The Alternative Time Warp

12

Ivory Towers
AQR Dominates

14

Alexa! Take Me to My Office

LETTER FROM THE BOARD

Sylvester Flood

Liquid alts are the boy who cried wolf of the
post-global-financial-crisis bull market.

The Old Squirrel

Policy
16

How Regulators Can Unleash Fintech
to Improve Retirement Security
Behavioral Insights

18

The scenarios for which liquid alternatives
funds were created have for the most part not
come to fruition, and any allocation made
to these strategies would almost surely have
underperformed almost all investments
in pure beta. To be fair to alts, though, the same
can be said of active strategies in general.

What's Our Real Impact?
Behavior Gap

20

Express Yourself

22

Americas
Greater Europe
Australia & New Zealand
Asia

So, it shouldn't be surprising that today
alternatives comprise only 1.25% of
U.S. investors' dollars in mutual funds and
exchange-traded funds.

Global Briefs
25
26
27

If you had placed cautious clients in cash
or short-term bonds coming out of the financial
crisis, though, you'd be looking at a negative
real rate of return for as long as you held
out. Meanwhile, an allocation to an optionsbased or hedged-equity strategy would
have delivered a low, non-negative real return
at about half the risk of the S&P 500.
But U.S. investor interest in liquid alts
strategies has weakened over the past year.
Although the product class overall has
positive inflows, the top five providers have
captured $7.1 billion while the other 213 firms
have lost $2 billion.
Hindsight bias is surely at play if you think
the next eight years will look like the previous
eight. Which is why I'm proposing something that
could have been proposed in any year in the

8

Morningstar February/March 2018

past nine and would have been wrong: Give liquid
alts a fresh look.
As my colleagues Josh Charney and Jason Kephart
explain in their articles in this issue's Spotlight
(Page 28), alts are hard to understand, much less
choose with conviction. But that's what
Morningstar's here for, and Charney and Kephart
explain how we do it.
Back to your clients, particularly ones
who are nearing retirement, skittish, or just don't
want to miss out on bull market fun but need
a safety net. You owe it to them to seek out
reasonable options to protect their capital. A new
or renewed allocation to cash is a bet that
the worm is about to turn. That's a bet that hasn't
worked well for almost a decade.
Acknowledging Obvious Problems

Several characteristics of liquid alts violate
what are considered pillars of soundly constructed
21st century portfolios:
High Fees
The headline fees of most alts are enough to make
advisors dismiss them out of hand.
Complexity
How do you explain the inclusion of a strategy
that might use options, futures, or leverage
to a client that you've trained to love the bland
flavor of a portfolio of passive vehicles?
Style Impurity
Alts can play trickster in an otherwise robustly
constructed portfolio.
Unknowable Responses to Unknowable Events
A great alts strategy is great until it isn't.
There's no way to know when your global macro
or long-short manager is going to stumble.
But this is where research helps. It's about
understanding and seeking specific risk factors
that drive the returns of a strategy, not
necessarily which fund is going to outperform
but where the outperformance or uncorrelated
returns can be sourced.
Consider that few advisors 20 years ago could
imagine investment portfolios predominantly



Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2018

Contents
Morningstar Magazine - February/March 2018 - Cover1
Morningstar Magazine - February/March 2018 - Cover2
Morningstar Magazine - February/March 2018 - 1
Morningstar Magazine - February/March 2018 - 2
Morningstar Magazine - February/March 2018 - Contents
Morningstar Magazine - February/March 2018 - 4
Morningstar Magazine - February/March 2018 - 5
Morningstar Magazine - February/March 2018 - 6
Morningstar Magazine - February/March 2018 - 7
Morningstar Magazine - February/March 2018 - 8
Morningstar Magazine - February/March 2018 - 9
Morningstar Magazine - February/March 2018 - 10
Morningstar Magazine - February/March 2018 - 11
Morningstar Magazine - February/March 2018 - 12
Morningstar Magazine - February/March 2018 - 13
Morningstar Magazine - February/March 2018 - 14
Morningstar Magazine - February/March 2018 - 15
Morningstar Magazine - February/March 2018 - 16
Morningstar Magazine - February/March 2018 - 17
Morningstar Magazine - February/March 2018 - 18
Morningstar Magazine - February/March 2018 - 19
Morningstar Magazine - February/March 2018 - 20
Morningstar Magazine - February/March 2018 - 21
Morningstar Magazine - February/March 2018 - 22
Morningstar Magazine - February/March 2018 - 23
Morningstar Magazine - February/March 2018 - 24
Morningstar Magazine - February/March 2018 - 25
Morningstar Magazine - February/March 2018 - 26
Morningstar Magazine - February/March 2018 - 27
Morningstar Magazine - February/March 2018 - 28
Morningstar Magazine - February/March 2018 - 29
Morningstar Magazine - February/March 2018 - 30
Morningstar Magazine - February/March 2018 - 31
Morningstar Magazine - February/March 2018 - 32
Morningstar Magazine - February/March 2018 - 33
Morningstar Magazine - February/March 2018 - 34
Morningstar Magazine - February/March 2018 - 35
Morningstar Magazine - February/March 2018 - 36
Morningstar Magazine - February/March 2018 - 37
Morningstar Magazine - February/March 2018 - 38
Morningstar Magazine - February/March 2018 - 39
Morningstar Magazine - February/March 2018 - 40
Morningstar Magazine - February/March 2018 - 41
Morningstar Magazine - February/March 2018 - 42
Morningstar Magazine - February/March 2018 - 43
Morningstar Magazine - February/March 2018 - 44
Morningstar Magazine - February/March 2018 - 45
Morningstar Magazine - February/March 2018 - 46
Morningstar Magazine - February/March 2018 - 47
Morningstar Magazine - February/March 2018 - 48
Morningstar Magazine - February/March 2018 - 49
Morningstar Magazine - February/March 2018 - 50
Morningstar Magazine - February/March 2018 - 51
Morningstar Magazine - February/March 2018 - 52
Morningstar Magazine - February/March 2018 - 53
Morningstar Magazine - February/March 2018 - 54
Morningstar Magazine - February/March 2018 - 55
Morningstar Magazine - February/March 2018 - 56
Morningstar Magazine - February/March 2018 - 57
Morningstar Magazine - February/March 2018 - 58
Morningstar Magazine - February/March 2018 - 59
Morningstar Magazine - February/March 2018 - 60
Morningstar Magazine - February/March 2018 - 61
Morningstar Magazine - February/March 2018 - 62
Morningstar Magazine - February/March 2018 - 63
Morningstar Magazine - February/March 2018 - 64
Morningstar Magazine - February/March 2018 - 65
Morningstar Magazine - February/March 2018 - 66
Morningstar Magazine - February/March 2018 - 67
Morningstar Magazine - February/March 2018 - 68
Morningstar Magazine - February/March 2018 - 69
Morningstar Magazine - February/March 2018 - 70
Morningstar Magazine - February/March 2018 - 71
Morningstar Magazine - February/March 2018 - 72
Morningstar Magazine - February/March 2018 - 73
Morningstar Magazine - February/March 2018 - 74
Morningstar Magazine - February/March 2018 - 75
Morningstar Magazine - February/March 2018 - 76
Morningstar Magazine - February/March 2018 - 77
Morningstar Magazine - February/March 2018 - 78
Morningstar Magazine - February/March 2018 - 79
Morningstar Magazine - February/March 2018 - 80
Morningstar Magazine - February/March 2018 - Cover3
Morningstar Magazine - February/March 2018 - Cover4
http://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
http://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
http://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
http://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
http://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
http://www.nxtbookMEDIA.com