Wilshire Associates has launched two indexes aimed at bringing greater price clarity to liquid alternative mutual funds.
The firm’s Liquid Alternative Index will measure the performance of liquid alternative mutual funds. Its Focused Liquid Alternative Index is designed to help fund companies build funds of funds of liquid alternatives, or exchange-traded funds.
The news that Wilshire, creator of the Wilshire 5000 Total Market Index, has created a daily valuing system for liquid alts is the latest in a long line of evidence suggesting the asset class is here to stay.
The rise of liquid alternative mutual funds in the wake of the financial crisis has been nothing short of remarkable.
About 75 options existed at the end of 2008. Today, that number is about 450, and growing, according to estimates from Wilshire.
Liquid alternative funds have been knocking at the door of 401(k) investors, claiming the benefits of diversification and hedges against downside risk for retirement savers.
But their adoption in investment menus and target date funds has been slowed by a fundamental question: how do you price and value these complex instruments?
“We’ve seen firsthand the surge in demand for diversifying liquid alternative strategies among the clients we advise and believe that the Wilshire Liquid Alternative Index is a powerful tool to help investors understand how these difficult-to-rack mutual fund strategies are actually preforming,” said Jason Schwarz, president of Wilshire Fund Management.
In a statement, Schwarz said that alternative investments are designed to behave differently than tradition asset classes, making performance comparisons to the indexes that track traditional assets “counterintuitive.”
Basing liquid alternatives’ performance on hedge fund indexes is equally inefficient, given the inherent differences in the structures of the investments, added Schwarz.
Wilshire will value the funds based on their track record, their correlation to stocks and fixed-income performance, and their overall assets under management. Alt funds’ daily performance will be tracked going back to Dec. 31, 2013, and their monthly performance tracked going back to Dec. 31, 1999.
Check out Ritholtz to Alt Fund Investors: Beware ‘Negative Alpha’ on ThinkAdvisor.