Liquid alternative investments have tripled in the past few years, growing from about $102 billion in early-2011 to $314 billion as of Sept. 30, 2014, according to recent Aite Group report.
But despite the increasing popularity of liquid alts, there are several misconceptions about funds that focus on these investments, say Aite analysts Howard Tai and Gabriel Wang in their study “Liquid Alternative Investments: A Passing Fancy, or the Real McCoy?”
The study examines these notions in detail and debunks some common myths about liquid-alt funds, including those that claim:
- Investors’ “hot money” chases fund performance
- Large fund size with a more prestigious manager ensures better performance
- Funds with the highest returns provide the best risk-adjusted results for investors.
Hot money chases hot performance—or does it?
The Aite research considered fund flows through the third quarter of this year and found very little evidence to support the cause-and-effect theory that good performance will lead to significant inflows for hot funds and their associated investment strategy.
For example, market-neutral funds, which produced slightly negative year-to-date returns, attracted the most money as a percentage of assets under management. In contrast, dedicated short-bias funds had asset growth of 5%, even though they posted the worst five-year performance of the strategies reviewed by the consulting group.
“Maybe in the initial year or two, or even three, performance tends to be the deciding factor in attracting flows, but that’s not always the case,” says Tai. “There are some really good performers that don’t get the right level of publicity and marketing support or distribution, and then they become sort of the best kept secret in an industry.”
A more likely explanation for inflow growth among funds that became the biggest in their respective categories is that increased marketing support and broader distribution networks help these big funds attract new money, he adds.