While the industry has long been talking about the convergence of alternatives and mutual funds, the growth of liquid alternatives did not pick up steam until the past few years. Simply defined, liquid alternative funds are daily NAV funds that use an investment strategy that provides a source of return differentiated from traditional, long-only equity and bond market exposure. These strategies include the ability to utilize a broad array of financial markets, instruments and derivatives, leverage, and invest both long and/or short.
Cerulli estimates that at the end of 1Q 2013 there was approximately $400 billion1 in assets under management in liquid alternatives strategies, representing roughly 2% of the industry assets. They forecast that in the next 10 years these strategies will represent 14% of total industry assets2. This growth is driven by both supply and demand side factors. Higher fees (compared to traditional mutual funds) coupled with the opportunity to tap into retail investors and the growing defined contribution and IRA markets provide asset managers with a strong incentive to launch retail alternative funds. At the same time, the opportunity for risk diversification and non-traditional sources of yield are driving demand from retail investors and their advisors.