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.
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.