This is the second in a series of blogs exploring the use of liquid alternatives by advisors.
A few years ago, hedge funds were perceived as investments with bond-like volatility and equity-like returns. That changed with the credit crisis of 2008, which showed that most alternative strategies are vulnerable to the same market whims as long-only investments.
Hedge funds now have the reputation as a less volatile source of investment returns. This sea change has made the asset class more popular than ever, even though hedge fund returns significantly lag the stock market.
The utility of alternative strategies as a risk reducer among the RIA community has experienced a similar renaissance, as the use of liquid alternatives – mutual funds that are designed give the same sort of return stream as their less liquid hedge fund kin – have skyrocketed.
One thing I wanted to discover when doing the reporting for my Investment Advisor August cover story, Alts Are the Answer, was how advisors are choosing alternative funds. Their response to that question reflected the considerable thought used to determine which funds are most appropriate for client accounts.