As is always the case, the only thing constant in life is change. For years, hedge funds have enjoyed a rather favorable environment. They have been allowed to collect high fees without producing the impressive results investors have come to expect. As their returns have collectively been unimpressive, investors have grown tired of the lack of liquidity and transparency.
The reasons for underperformance range from lack of opportunity set to crowded trades and everything in between. Large investors are now faced with a conundrum – do they continue to fund alternative investments, or do they allocate more funds to traditional fixed income and equity managers?
Unfortunately, this decision is further complicated by the current market environment. Bond yields are trading near record lows, while equities are entering their 8th calendar year of positive performance. Meanwhile, economies around the world are sputtering from economic headwinds. Investors are likely to collect below average returns in the near-term while experiencing above average volatility.
As investors attempt to diversify their traditional asset portfolios, their options are unfortunately limited. Alternatives are available in the form of limited partnerships which include layers of fees, lack of transparency, and illiquidity. Or investors can opt for the new cadre of mutual funds that have recently grown in popularity. They offer strategies and investment opportunities that aim to mimic the return streams of hedge funds. Unfortunately, these funds face similar challenges as hedge funds, but also face the disadvantage of a limited opportunity set, due to the need to stay liquid.
Meanwhile, pension funds and endowments are under pressure to increase returns, reduce fees, and improve transparency. Within the current landscape of alternatives, this is an almost impossible mission. Until Now! Enter the new paradigm in alternative investing – the Separately Managed Alternative.
Separately Managed Alternatives are investment strategies that utilize low-cost Exchange-Traded Funds (“ETF’s”) in quantitatively driven portfolios. The accounts are low cost, extremely liquid, and completely transparent. There are no excessive fees, lengthy lock-ups, or illiquid securities. This results in a diversified, repeatable process that is uncorrelated to a traditionally invested portfolio.
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