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Liquid Alternatives: Invest Without Compromise

The Pandemic brought unparalleled volatility to financial markets in 2020. A recovery followed a sharp drop in the equity markets that was unprecedented in its speed. A similar outcome occurred in the credit markets with spreads returning to pre-pandemic levels due to the Federal Reserve's quick action. Commodities dropped also as future demand appeared weakened by the Pandemic. Thus, investors are increasingly sensitive to higher volatility and the prospect of low returns on their fixed income portfolios. The natural response is to seek alternative asset classes that mitigate portfolio risk while achieving a more consistent return stream.

Source: Cristian Palmer on Unsplash

The challenge for investors is that non-traditional asset classes (e.g., hedge funds and private equity) that provide diversification are notoriously illiquid. This trait may heighten an investor’s risk when they require liquidity. Thus, access to the alternative risk premia is only valuable to an investor when it enables accessing their investments in turmoil times. When combined with returns that did not exceed the traditional asset classes over the last ten years, the case for higher fees and lower liquidity is not compelling.[1]

Liquid alternatives remove the liquidity constraint by matching the factor profiles of alternative strategies with liquid markets investments. Further, they provide an investment vehicle that reduces fees, delivers hedge fund-like returns, and helps manages total portfolio risk in a traditional portfolio. These benefits offer investors more choices to achieve their specific portfolio objectives. Liquid alternatives invest without compromise.

The Benefits of Fungibility and Accessibility

The value of liquidity emanates from its fungibility. Since the returns of assets are time-varying, liquidity offers the ability to switch into another investment offering a better relative opportunity. These relative value investments may arrive when illiquidity occurs because of a credit crisis, the popping of an equity bubble, or another market event. Liquidity permits an investor to exploit market events dynamically.

Fungibility enables tactical decisions.

The liquidity challenge is the trade-off between ready access to cash and expected return, particularly in a low yield environment. The promise of high returns in alternative asset comes at the cost of reduced liquidity.