The liquid alternatives mutual fund juggernaut continues to gather momentum. Consider these stats from Morningstar: Including non-traditional bond funds, 89 new alternative funds launched in 2013 with another 17 in the first quarter of 2014.
Net inflows to the funds that Morningstar classifies as alternatives were $95.6 billion. Since the end of 2007, the research firm notes, the number of alternative strategy mutual funds has more than doubled.
Some categories of alternative funds have benefited more than others. In 2013 $55 billion of net inflows went to bond funds, $20.6 billion to long-short equity funds and $9.6 billion to multialternative funds. The amounts flowing to the other classification categories that Morningstar uses were much lower and multicurrency funds experienced a net outflow of $482 million.
Given these flows, it’s not surprising that advisors want access to liquid alts in the variable annuities (VA) they use. Laurence Greenberg, president of Jefferson National in Louisville, Kentucky, says that advisors working with the company’s Monument Advisor VA can choose from about 60 liquid alt funds on the product’s platform.
That number represents 15 percent of the 400 or so funds available and he estimates that the usual allocation range to these funds within accounts is 5 to 10 percent overall. Specific liquid alts typically get added because the RIAs and fee-based advisors using the platform request them, he says.
“We have obviously our own due diligence process where we collect information and have the fund companies go through due diligence process before we add them, but we like to add funds and options really based on what we see as demand in the marketplace,” Greenberg says.
Are They Worth It?
Each strategy and fund has to be evaluated individually, Greenberg cautions, citing the example of comparing two funds. “You really have to understand each fund just the way you would if you’re looking at two similarly positioned long-term bond funds or large cap equity funds,” he says. “You have to look at the specific characteristics and performance of each fund.”
When you consider liquid alts’ overall higher fees versus traditional funds and ETFs, plus many funds’ weak performances year-to-date, it’s fair to ask if their benefits outweigh their costs for retirement portfolios. While cautioning against broadly general applications, Greenberg sees two key points supporting the case for retirees to own liquid alts.
First, it’s a difficult environment for income investors and expecting fixed income investments to consistently produce 5 or 6 percent returns isn’t realistic, hence the interest in non-traditional bond funds. Increasing longevity also supports the case for liquid alts, he believes. Investors need to grow principal and income to support longer life expectancies and alternatives can help them achieve that result, he maintains.