Morningstar - Q2 2023 - 40

Strategies
Alternatives for the Masses?
Why liquid-alts funds are not suitable for
the typical investor.
Research
47 New Quantitative Rating Expands
Our Coverage of Model Portfolios
Quant U
50
Solving the Retirement Equations, Part I
Best Ideas
53 Manager: Moderate Doesn't
Mean Mundane
54 Passive: Low Cost, Well Diversified
55
Equity: Building a One-Stop Shop
ALTERNATIVES
Laurence B. Siegel
As a long-standing supporter of the endowment
model, I've spent decades balancing my
enthusiasm for active management and alternative
investments against my theory- and evidencebased
belief in indexing. But my advocacy of
alternatives has been targeted to institutions and
ultra-high-net-worth investors. The recent
embrace of so-called liquid alternatives by ordinary
Americans seeking to fund their retirement
is deeply troubling.
What Are Liquid Alternatives?
A traditional investment is a publicly traded stock,
bond, or money market instrument, or fund
thereof, in any country in the world. Everything
else is alternative.1
Alternatives, being an " all other " category, are
very diverse. They run the gamut from the
mundane (rental real estate) to the exotic (fine art,
royalties, life settlements). Cryptocurrencies
are alternatives, although calling them investments
is stretching a point.
The alternative investments that have recently
appealed to individual investors-and that
have been pushed by some advisors-are
liquid alternatives. These are otherwise illiquid
strategies, such as private equity, hedge
funds, and real estate, that have been repackaged
as mutual funds or exchange-traded funds
so that they are tradable daily on an exchange.
Because of this repackaging, individuals
can buy, hold, and sell them with modest
amounts of money.2
In a fairly recent Morningstar article, John
Rekenthaler presented a classification scheme
for liquid alternatives, used for organizing
Morningstar's reports on these funds.3
categories, or investment styles, that are
in the Morningstar liquid-alts database are:
gEquity market neutral
gEvent-driven
gMacro trading
gMultistrategy
gOptions trading
gRelative value arbitrage
gSystematic trend
These strategies are all hedge fund-like.
This article focuses only on the liquid-alts versions
of these categories. Private equity, real estate,
and exotics are excluded, making my analysis
more manageable.
1 At one time, all investments were alternatives. Then, starting in the late Renaissance, stock exchanges, bond dealers, and
other agents began to standardize investment instruments and facilitate trading. These innovators made the old kinds
of investment-buildings, farmland, mines, ships, banks, and all kinds of businesses held in a form that we would now call
private equity-alternative.
2 I am old enough to remember when European and Japanese stocks were considered liquid alternatives. REITs also
used to fit the description. After about 1990, hedge funds that invested in publicly traded stocks and bonds (and sometimes
commodities and currencies) called themselves liquid alternatives, on the grounds that the underlying assets were
liquid even though the fund shares were not. But today, the phrase liquid alternatives generally refers to what I cover in
this article.
3 Rekenthaler, J. 2021. " Liquid Alternatives Funds: Is There Any Hope? " Morningstar.com. July 22.
40
Morningstar Q2 2023
The fund

https://www.morningstar.com/articles/1049091/liquid-alternatives-funds-is-there-any-hope http://www.Morningstar.com

Morningstar - Q2 2023

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