How Advisors Use Liquid Alts: The Business Continuity Issue

Talking to scores of advisors about their use of liquid alternatives left me with more information than I could use for August’s Investment Advisor cover story on the subject.  Among the reasons cited in the article were using liquid alts in an attempt to reduce portfolio risk while generating the returns clients need to meet their objectives. Other advisors I interviewed made clear that they keep a sharp eye on costs and look at the longest-term track records they can find, even if part of that record is in private partnerships. 

In this, the first post in a series of blogs during the month of August, I’ll relate some of the key additional findings from my reporting on advisors’ use of liquid alternatives. 

One area in particular that deserves some attention is the use of alternatives in reducing volatility. That holds true both in client portfolios and for RIA firms themselves. Most RIAs commented that their clients don’t need the make pure equity returns, and don’t want the volatility of an unhedged stock portfolio. This is mainly due to the rising number of baby boomers nearing retirement. 

With advisors saying that nothing would be worse than a “2008-sized moment,” a common allocation range for alternatives is 20% to 25%. Many RIAs feel a smaller commitment doesn’t sufficiently reduce volatility.

Using hedge funds is an option, but RIAs complain that E&O insurance rates can be much higher if limited partnerships are included in client portfolios. High limited partnership custody fees are also a common complaint.

The bottom line is simple. Clients can’t take another 2008 wealth drawdown – and a fee-only practice will experience a proportional cash flow reduction in a bear market.  

That puts both on the same side of the table. If the objective is to allow clients to participate in market upside, while protecting downside, liquid alts deserve a place at the table.  

With that said, the next step is figuring out which ones to buy, which will be the topic of our next blog. 

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