Investors who incorporate liquid alternatives in their portfolios made significant allocations into the relative value space during the first quarter after having divested from these strategies throughout 2016, Wilshire Fund Management reported last week.
Assets under management in relative value, which comprises credit, convertible arbitrage and volatility funds, increased by $15.5 billion. Guggenheim Macro Opportunities Fund and Metropolitan West Unconstrained Bond Fund, two big relative value strategies, each saw $1 billion in net inflows during the January-to-March period.
Wilshire said investors seeking to minimize duration exposure in light of anticipated Fed rate hikes could further drive inflows into relative value strategies for the rest of this year.
In contrast, investors for the second consecutive quarter continued to pull out of the global macro space, which includes systematic, discretionary, commodity and currency funds, posting net outflows of $400 million.
Overall, liquid alternative assets increased in the first quarter by $17.6 billion through a combination of organic growth, capital flows and new entrants, Wilshire reported.
Seven new funds rolled out—three equity hedge, two relative value, and one global macro and one multi-strategy—and five pre-existing funds were reclassified as liquid alternatives. Eighteen funds were liquidated.
At the end of the first quarter, the liquid alt universe encompassed 521 funds with $307 billion in assets under management.
The S&P 500 Index posted a 6.07% return during the first quarter, while the Bloomberg Barclays Aggregate Bond Index returned 0.8%.
For its part, the Wilshire Liquid Alternatives Index reported 1.4% quarterly performance, in line with the HFRX Global Hedge Fund Index, but lagging the HFRI Fund Weighted Composite by some 94 basis points.
The Wilshire Liquid Alternative Index family is a joint offering between Wilshire Funds Management, the global investment management business unit of Wilshire Associates Incorporated, and Wilshire Analytics, creator of the Wilshire 5000 Total Market Index.
The equity hedge sub-index, which includes long/short equity and market neutral funds, gained 0.1% in March and 1.9% for the first quarter, underperforming the HFRX equity hedge index by 61 and 77 basis points, respectively.
Long-biased equity managers were the largest contributors to the performance, as equity markets gained in every month throughout the quarter.
The relative value sub-index finished March up 0.2%, well ahead of the HFRX relative value arbitrage index, which was down 0.2%. Both returned 1% in the first quarter.
Wilshire noted that credit managers were able to take advantage of spread compression in both investment grade and high yield markets. Multi-strategy and convertible arb managers also did well throughout the quarter.
Only volatility managers detracted from performance in the relative value space.
Credit, merger arb and special situations funds in the event-driven sub-index fell 0.1% in March, finishing the first quarter up 0.8%, 216 basis points behind the HFRX event-driven index.
Credit managers were the largest contributors to quarterly performance as corporate credit markets experienced positive market technicals and price appreciation, mainly in January and February. Credit risk benefited, evidenced by the Merrill Lynch’s speculative-junk-bonds-tracking High Yield CCC bond index, which gained 520 basis points for the quarter.
Wilshire’s global macro sub-index fell 0.2% in March, but ended the first quarter up 1.2%, outperforming the HFRX macro/CTA index’s 0.8% quarterly loss.
As the Trump trade rally has slowed down, the strong gains that occurred in equity markets, the U.S. dollar and U.S. government yields have all diminished or reversed, Wilshire noted.
Discretionary managers consistently performed throughout the first quarter, taking advantage of the strong equity markets globally and navigating the energy markets and the Fed’s March 15 interest rate hike.
“For the quarter, systematic, discretionary and currency strategies all contributed positively to the index, while CTAs showed negative performance for January and March, detracting from a strong February,” Jason Schwarz, president of Wilshire Funds Management, said in a statement.
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