Alternatives: There for You Through the Bad Times

Up to now, many investors have shied away from liquid alternatives due to the disappointing relative returns of several of these products when viewed in the context of a robust bull market. For the three-year period ending this past December, Multi-Strategy Hedge funds posted an annual average return of 3.90% versus the S&P 500 at 12.65%.

But this week’s dramatic market volatility may lead a good number of investors to reconsider the value of alternatives. The table below shows the returns of a group of broad market indices including the S&P 500, NASDAQ, DOW and the EAFE for August, 2015. It also shows the returns of the five largest (by AUM) Multi-Strategy Alternative mutual funds. The groupings of results through the correction are compelling validation of the contribution of these alternatives to mitigating volatility in long-only portfolios.

Alts Crisis chart_email blast
In the year ending this July, alternative mutual funds attracted roughly $10 billion in cash inflows. (This may not seem like a windfall but it is material in a period when actively managed long-only US equity funds suffered over $150 million in net outflows). In the wake of current events, we expect alternative fund inflows to accelerate substantially as these products prove their worth in stormy markets.