If investors want to benefit from sophisticated risk management and asset allocation tools like those used by major institutional investors, they will need to become familiar with liquid alternatives, says Forward Management.
As described in Forward's new investor guide – 7 Things to Know About Investing With Liquid Alts – liquid alternatives are a new breed of hybrid mutual funds combining hedge-fund-style strategies with the liquidity, transparency and regulatory oversight of the mutual fund structure. Forward was among the first wave of asset managers to develop alternative strategies structured as mutual funds.
"Liquid alts are relatively new and unfamiliar to most non-institutional investors and also require a somewhat different way of thinking than traditional stock and bond investing," says Nathan J Rowader, Forward's director of investments. "This is why investor education is doubly important when it comes to liquid alts."
Concise and easy to read, Forward's liquid alts primer dispels the common view of alternative investing as a high-risk endeavour targeting lofty returns. Like many of the hedge funds they resemble, liquid alternatives are designed primarily to reduce portfolio risks or "de-risk" portfolios. They do this by investing in asset classes that have different performance characteristics than traditional stocks and bonds. Others use flexible approaches, such as long/short investing, in an effort to hedge against market downturns. A chart included below shows the universe of liquid alt strategies, which continues to evolve.
The guide also takes aim at the notion that investors should currently be maximising their exposure to US stocks rather than diversifying their equity allocations. "In a bull market as long-running as this one, investors are often torn between defensively moving some assets into cash versus staying fully invested in the market's rise. Diversifying with liquid alts lets them keep 100% of their assets working while taking steps toward risk-management goals," says Rowader.
The guide includes actionable advice for investors who want to explore alternatives and cautions investors to be sure they understand the workings of any liquid alts strategy before they invest in it. A checklist for evaluating funds is included.
In line with the recommendations of several large financial advisory firms, the guide suggests that affluent investors (depending on their individual risk profile and objectives) need to allocate at least 20 per cent of assets to liquid alts in order to diversify effectively.
Forward has specialised in liquid alternatives since 2006, well before the financial crisis led to an explosion of alternative strategies. Its diverse offerings include strategies designed to help investors meet their objectives for asset class and geographic diversification, investment income, inflation protection, volatility management and tax efficiency.