Advisors are still flocking to liquid alternative strategies.
According to a recent survey conducted by Morningstar and Barron’s, 73 percent of advisors prefer the mutual fund structure to access alternative strategies. That’s a significant increase from the 57 percent preference cited in the prior year’s survey.
Nontraditional bond funds saw the largest fund flows for 2013 and year-to-date 2014, followed by long-short equity funds and multi-alternative funds.
However, advisors claim the search for yield isn’t the main reason they’re investing in alternative fixed income products. Only 12 percent cite yield as what they value most in these funds, while 39 percent value the funds’ low correlation to traditional fixed income most highly.
Fund sponsors recognize the search for diversification and are responding appropriately.
In terms of new fund launches, multi-alternative funds, which offer exposure to multiple strategies in one account, have shown the greatest increase in recent years. From 2011 through May 2014, 279 new funds started operations and 82 of them, almost one-third, were in the multi-alternative category.
Larry Restieri, head of alternative sales for Global Third Party Distribution within Goldman Sachs Asset Management in New York, agrees that advisors are primarily using liquid alternatives for their diversification benefits vs. higher yields.
Consequently, when advisors consider adding alternatives to a client’s portfolio, Restieri says, the multi-alternative funds are a “natural entry point.” He cites the Goldman Sachs Multi-Manager Alternatives Fund (GSMMX) as an example of how these funds can provide broad diversification with one investment.
The fund opened April 30, 2013, and had net assets of $515.6 million as of June 30.
The fund’s assets are divided among seven sub-advisors with allocations to five strategies:
dynamic equity (14.6 percent of assets);
equity long/short (16.6 percent);
event-driven and credit opportunities (38.6 percent);
opportunistic fixed income (12.8 percent); and
tactical trading (15.6 percent). So far, the fund’s returns reflect the steadier, less volatile pattern that advisors and investors seek from alternatives. According to the fund’s May 2014 monthly update, since the I-class share’s inception, the fund has generated an annualized return (at net asset value) of 6.89 percent, compared with annualized returns of 3.39 percent for the HFRX Global Hedge Fund Index, 21.20 percent for the S&P 500 and 17.26 percent for the MSCI World.
Admittedly, single-digit returns are less appealing in comparison to the stock market’s recent results, but that’s only half the risk-return story. Though the fund’s returns are lower than the long-only stock indexes, so is its volatility.
Since inception, the fund has had a realized beta to the MSCI World index of 0.46 with annualized volatility of 5.1 percent. That’s less than half the S&P 500’s 11 percent annualized volatility and lower than the MSCI World index’s 9.6 percent annualized volatility over the same period.
With stock market indexes at record levels and a likelihood of higher interest rates diminishing bonds’ returns, the relatively steady, non-correlated returns potentially available with multi-alternative funds could provide a valuable buffer for clients’ portfolios.