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Investors seeking more liquid hedge fund solutions

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While interest has been returning to the hedge fund space, investors today are seeking more liquid, transparent and cost effective solutions for gaining access to the asset class, according to a research paper by Credit Suisse.

The whitepaper, Portfolio Idea: Enhancing Liquidity in Alternative Portfolios, examines liquid alternative beta strategies and their impact on portfolio liquidity.

Jordan Drachman, head of research for alternative beta strategies in the asset management division at Credit Suisse, says: "The paper explores a challenge that many investors face in their alternative portfolios: how to increase portfolio liquidity without sacrificing potential returns, especially in a post-crisis, low-yield environment. While interest has been returning to the hedge fund space, investors today are seeking more liquid, transparent and cost effective solutions for gaining access to the asset class."

The paper says the acceptance of alternative beta as an effective diversification and portfolio-management tool is likely to continue to grow, echoing the growth of index-linked investments in the long-only space.

Although not suitable for all investors, and not usually considered as a full-out replacement for individual hedge funds, Credit Suisse believes that liquid alternative beta can play an important role when applied strategically within a diversified portfolio.

Liquid alternative beta may offer the ability to access potential hedge-fund-like returns in a liquid, cost-effective manner in what is otherwise a mainly illiquid asset class. In fact, replication strategies directly address many of the issues facing investors seeking hedge fund exposure—such as desire for increased transparency, liquidity and cost efficiency—while providing effective access to the return streams of the broad hedge fund market.

The paper says liquid alternative beta can play a number of roles in investors’ portfolios, whether it is fulfilling a role as the core exposure in a core/satellite portfolio, providing liquidity management options, shorting a hedge fund sector or providing a regulatory solution for investors with constraints on their alternative allocations.

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