Stocks are volatile, near record levels; bonds offer low yields and exposure to rising interest rates. What’s more, the return from stashing money in cash is akin to hiding it between the box springs.
Naturally, financial planners and clients are turning to other choices. Fund companies have gotten the message so high minimums, high fees and low liquidity are no longer the rule in the world of alternative investments. Liquid alts, as they’re known, may be as accessible and disposable as familiar funds. From a total of $169 billion in assets in 2007, total assets in alt mutual funds and ETFs have been projected to reach $650 billion by 2017.
“They’re the third leg of the stool,” says Les Detterbeck, who heads a wealth management firm in Charleston, S.C. “We consider them to be a very important part of clients’ portfolios. Most of our clients have a 20%-30% allocation to liquid alts.”
Nevertheless, bringing liquid alts to clients is far from simple. “Compared to traditional asset classes,” says Detterbeck, “using liquid alts can be very challenging. It takes a great deal of time and energy to keep up and make sure we’re not missing new strategies.”
Devoting that time and effort have enabled Detterbeck’s firm to put together a model portfolio of multiple liquid alts. The current version has 10 components, ranging from the SPDR Dow Jones Global Real Estate ETF (6% of the liquid alt model portfolio) to MainStay Marketfield, a long/short fund (15%).
Compiling a portfolio of liquid alts, though, is only half of the job. These largely unfamiliar funds must be explained to clients. “We constantly need to remind them what liquid alts are and why we have them in their portfolios,” says Detterbeck.
His son Brett, who serves as the firm’s president and head portfolio manager, recently posted a blog entry on the Detterbeck Wealth Management website, “What exactly is an alt?” There is no one true definition, readers were informed, but alts generally have several key elements, including non-correlation to traditional markets. Zigging when other assets zag leads to smaller downsides and “better geometric compounding,” for greater long-term returns.
“Some of our clients are engineers,” says Les Detterbeck. “They go through the whole list of funds in the alts portfolio, to see how they work. We’ve even seen such clients compute beta and Sharpe ratios on their own. For the most part, though, clients don’t need to know all the details. They want to see examples of how the portfolio has performed in the past. Clients want to know what’s in these funds, and they should know that liquid alts are usually actively-managed while our traditional funds tend to be passive. Perhaps most of all, clients need to hear that our alt portfolio may give up some upside but also acts as a portfolio stabilizer, so they probably won’t be hurt as badly if the stock market crashes.”