GSAM: Liquid Alternatives Show Potential Should Equities Boom Fade

Most liquid alternative strategies posted positive performance last year, suggesting they have the potential to reduce portfolio risk and contribute to long-term wealth once the boom fades for equities and other high-flying asset classes, according to a recent Connect post from Goldman Sachs Asset Management (GSAM).

Despite mixed performance in the first half of 2016 and outflows through the year, liquid alternative investments (LAI) came out strong during the second half as interest rates rose and political uncertainty mounted. Four of the five LAI Peer Groups—GSAM’s categorization in its Liquid Alternative Investments Market Analysis & Performance Summary (MAPS)—finished the year in the positive. These included Relative Value, Tactical Trading/Macro, Multistrategy, Equity Long/Short, and Event Driven. Only the Tactical Trading/Macro Peer Group experienced a slight, -0.7% decline.

While liquid alternatives saw positive performance last year overall, they also reported annual net outflows for the first time since 2000. But this was more a function of the surging equities market than a sign of any fundamental weakness, some argue. “Similarly, last year saw near-record hedge fund withdrawals and a number of fund closures, yet the hedge fund industry reached a record $3 trillion in assets under management due to positive performance in the second half of 2016,” GSAM pointed out in its post. “We would emphasize the importance of a long-term, strategic allocation to alternatives. Given muted return expectations for major asset classes in the coming years, we think now is a good time to take a fresh look at these strategies.”

In 4Q 2016, all of GSAM’s MAPS peer groups posted gains except Tactical Trading/Macro, which saw a -1.1% decline. Relative Value enjoyed a median rise of 1.6%, Equity Long/Short 1.2%, Event Driven 1%, and Multistrategy 0.2%. Between Nov. 4 and Dec. 16, nearly 80% of funds in the Multistrategy Peer Group, representing diversified liquid alternative strategies offered as mutual funds, reported a median gain of 1.3%, GSAM’s Connect post said.

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LAI Peer Groups including Equity Long/Short, Tactical Trading/Macro, and Multistrategy performed similarly to relevant hedge fund indices over long time horizons, according to the MAPS report. Generally speaking, LAI returns have diverged from those for stocks and bonds. While alternatives underperformed equities in 2016, volatility for the Multistrategy Peer Group and HFRX Global Hedge Fund Index was significantly lower than for equities and slightly higher than for bonds, according to GSAM’s post.

Tags: equities boom, Goldman Sachs Asset Management, LAI Peer Groups, Liquid Alternative Investments, portfolio risk

Public pension funds are still slow to embrace shareholder activism, according to Rhode Island General Treasurer Seth Magaziner. This is something he’d like to see change.

“If you look at the trillions of public pension fund dollars across the country, a vast majority of them are still on the sidelines,” Magaziner said.

Magaziner shared Rhode Island’s experience in shareholder engagement and discussed the challenges within the space at Skytop Strategies’ ESG3 Summit on April 7th in New York City.

“A pension fund should care about long-term sustainability, should be engaging with companies with an eye towards the long term,” he said. “We are the ultimate long-term investors. It is a perpetual fund.” As the state’s general treasurer, Magaziner heads the $8 billion Employees’ Retirement System of Rhode Island.

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Challenges plans face in becoming more actively engaged shareholders include: educating the investment staff and committee about engagement, understanding when and how to engage, elements of the plan’s governance structure, and managing public opinion. “When you talk about public pension funds, it is always political,” Magaziner said. “You’re always in the spotlight in a way that other institutional investors may not be.”

Becoming an active shareholder was a slow process for the Rhode Island fund. In order to actively engage, the state had to amend its investment strategy, changing some of its passively indexed commingled equity holdings to a separate account, thereby taking more direct ownership of its public equities. After moving its holdings to a separately managed account, the plan developed and formalized a voting policy based in part on best practices around the country.

Board diversity is an important issue for the state. “We know that companies with diverse leadership teams, the data shows, are more likely to be more profitable, have stronger stock performance, have lower debt and better performance over time,” Magaziner said. But, “despite the wealth of data that shows that diverse teams make better decisions, we still have only about 20% of board seats at Fortune 500 companies held by women and only about 15% by people of color.”

The state implemented a policy whereby it will vote “no” on proposed board candidates if approval would result in board representation falling to less than 30% diverse. Given the time it took the state to position itself to vote as a shareholder, the fund only started implementing this policy halfway through last year’s proxy season, but on 257 occasions subsequently, it voted against a proposed board member.

The plan is now able to co-file proxy proposals as well. Political spending in the energy industry, governance practices at Wells Fargo, and student loan debt servicing practices are among the issues it intends to tackle.

“Engagement is often a better way to get things done and drive change,” Magaziner said. “[It is] better to be engaging and pestering someone, all else being equal.”

By Amrita Sareen-Tak