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.

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.