![]() ![]() If a fund meets any of these criteria, it may be considered a liquid alternative. Nontraditional strategies (such as long/short equity positions).Liquid alts as defined by the SEC - an alternative fund is understood to be a fund whose primary investment strategy falls into one or more of the following buckets: One needs only to look at the definition of liquid alternatives through the eyes of FINRA and the SEC to understand this perspective. It’s critical for investors, advisers and broker/dealers to understand that regulators view these products as complex regardless of the liquidity and other benefits. Unfortunately, this also gives the appearance they may be suitable for most investors. Liquid alternatives are funds registered under the Investment Company Act of 1940 (’40 Act), which subjects them to greater restrictions than unconstrained funds, including limits on leverage and illiquid investments, diversification requirements, daily pricing, fees, and redeemability of shares. LPs typically incentivize managers with high fees to attract top talent, the most common being the “2 and 20” fee structure (2 percent of the fund’s assets, plus 20 percent of its gains). Many LPs offer little or no liquidity for periods of months or years to match the illiquidity of the underlying assets. This structure and others can be exempt from registration with the SEC, allowing maximum flexibility in terms of strategies, leverage, liquidity, concentration and redemptions. In the past, alternative investments were primarily offered in a limited partnership (LP) structure. ![]() This could encompass hedge fund strategies, which are normally employed in unconstrained structures, real assets, nontraditional bonds, currencies and complex ETF strategies such as inverse and leveraged ETFs. There’s no exact definition of a “liquid alternative.” It is a broad category that is any publicly registered fund that invests in anything other than long-only stocks or bonds. Complex products require heightened supervision, adequate due diligence, training of registered persons and documentation of these processes. In March 2014, Andrew Bowden, director of the Office of Compliance Inspections and Examinations of the SEC, described liquid alternatives as the “bright, shiny object … but they are a sharp object.” Just because a fund is registered and traded on an exchange does not mean it isn’t complex. Liquid alternatives managers may invest in complex strategies that investors are unfamiliar with, which could lead to a misunderstanding of how a fund will react in different market conditions leading to inappropriate buys, sells and allocations to a fund. Liquid alternatives - which are funds that invest in assets other than long-only stocks or bonds - provide access to strategies previously only available to high-net-worth investors and institutions.Īccess to strategies intended to help investors grow and protect their portfolios may be beneficial, although it is not without risk. There is ample research illustrating the use of alternative investments can improve the risk/return profile over the long term by helping to reduce volatility, differentiate sources of returns and create a more consistent return stream. The tech bubble and global financial crisis highlighted the need for diversification in client portfolios. ![]()
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