Inflows Boost Liquid Alts in a Troubled 2022

Liquid alternatives, which aren’t correlated to stocks and bonds, have been inching up in their acceptance by institutions, although they have a long way to go. Taking off after the 2008 financial crisis, they found acceptance among retail investors, but less among asset allocators, who can run their own alternatives strategies.

Only over the past two years have liquid alternatives, originally known as hedge funds for the masses, increased their sales appeal, both for retail and institutions. Reason: The big traditional assets, stocks and bonds, have both performed poorly of late. That leaves an opening for something completely different.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

A torrent of investments, some from institutions, has been sluicing into liquid alts mutual and exchange-traded funds, according to research group Morningstar. Through this year’s first half, the space garnered $23.3 billion in net inflows, besting the $18.4. billion from the comparable period in 2021.

That is quite a bounce from 2020’s showing, an outflow of $3.2 billion. From 2015 to 2020, outflows prevailed.

The top liquid alts funds nowadays are futures-oriented, a strategy called systemic trend. The performance leader for 2022 is AQR Managed Futures Strategy HV 1, which is up 50% through July 20, per Morningstar. The fund invests in 100 futures and forward contracts around the world, using a mix of equities, fixed income, currencies and commodities.

Historically, though, the nine-year-old fund didn’t have a great returns record during the great bull market that petered out at the end of 2021. It lost 2% last year and 0.65% in 2020. But in topsy-turvy 2022, the fund has come into its own, with the 50% gains.

This year, Arrow Managed Futures Strategy A and Guidepath Managed Futures Strategy Institutional are second and third in returns, ahead 44% and 39% respectively.

These assets have been very volatile, to say the least. Commodities, for instance, have been strong this year, although their prices have waned lately. The AQR fund aims to do well in both good and bad markets—with a robust shorting program for the latter.

Not all liquid alts funds have done well. Example: those in the long/short category, which is down 9.4% this year, by Morningstar’s count. This demonstrates “there’s still some equity market risk inherent in some of these strategy type,” says Morningstar analyst Bobby Blue.

Indeed, liquid alts have displayed some performance chops periodically in the past. For instance, in 2020’s first quarter, when the pandemic took hold, the S&P 500 drooped 20% and liquid alts lost just 9%, a Goldman Sachs Asset Management study found.

In 2019, liquid alts constituted about 4% of institutional assets, with average allotments ranging from a high of 6% of total assets among public pension funds to a low of 2% among corporate programs and outsourced CIOs in the U.S., a Greenwich Associates study detailed. The consulting firm has estimated that the institutional share has doubled since then.