August 7, 2013

2 Key Items to Consider in Alt Manager Selection

Adam Patti doesn’t think much of the current crop of long/short managers

Adam PattiNot all long/short strategies (or managers) are created equal, something about which Adam Patti doesn’t mince words.

“Every long-only manager is rolling out their long/short strategy,” the chief executive officer of IndexIQ told ThinkAdvisor on Tuesday. “Something like 80% or 85% of long-only managers underperform, but now we’re supposed to believe they’ll somehow outperform with a more complicated long/short strategy? I don’t think so.”

Patti (above) pointed to two areas, in particular, that are a key to success in the space.

“The first in transparency, something liquid alternatives afford,” Patti explained. “It’s the entire reason we launched the firm in 2006 which, I should add, was at a time when no one was talking about alternatives.”

In a few short years, he added, liquid alternatives have gone from a novelty to playing an important role in a diversified investment portfolio and the firm has seen strong interest in alternative from the institutional and retail advisor channels.  

The second, he noted, is track record. The IndexIQ IQ Alpha Hedge Strategy Fund (IQHIX) marked its five-year anniversary on June 30, which the firm claims was the first such fund to market.

As for the recent poor performance of managed futures and similar strategies, Patti said it is all a question of education.

“Any type of hedged strategy is going to drag in up-markets,” he argued. “Hedge strategies include the term ‘hedge,’ it’s what they do. They provide low correlation and reduced volatility. You give up performance on the upside to protect against the downside, something advisors are looking for.”

The strategies most in demand, Patti said, are fixed income substitutes.

“It’s a story we’ve been telling for the past 18 months, which is what happens to fixed-income exposures in rising interest rate environments. We’re starting to see that happen now. As fixed income performance crumbles, we’ve performed well.”

He also pointed to the firm’s merger arbitrage strategy.

“Everyone had noted the trillion of dollars sitting on the sidelines in the past few years,” he concluded. “Now corporate managers are starting to make moves again, and we’re well-positioned for it to happen.” 

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