The performance of liquid alternative funds may have fallen when compared to traditional asset classes, but that is no reason to ditch them in the long run.
In the latest edition of ‘Selector Snapshot’, one selector names a fund which provides a solid return above cash.
Selector: Nick Wood
Company: Quilter Cheviot (UK)
If you take a broad overview of the liquid alternatives space, one thing you might point out is that, while equity and bond markets have produced positive returns, the absolute return and hedge fund space has largely lagged.
To some extent that might have resulted in some investor disappointment. The way we have looked at it is you can't get higher returns without taking risk. Our priority has been to find investments that are largely uncorrelated with equities and bonds.
Investors will have an expectation that these funds should be resilient as and when we have a major sell-off in markets. That will be the test.
We are implementing this by investing in funds which we expect to have a lower correlation to traditional asset classes, as well as giving a diversified stream of returns.
We have tended to invest in a basket of funds rather than just seeking one overall solution. They are typically seeking to take advantage of different sources of market inefficiencies, so in combination you should get a steady return.
One example of a fund that we have been invested in for the past couple of years is the Invesco Global Targeted Returns fund. What attracted us to it is that it is broadly diversified over major asset classes including equities, commodities, FX and fixed income.
They are not trying to hit the ball out of the park, they are trying to produce a solid return above cash. If there is significant decline in the equity and bond markets, our view is that this fund should prove relatively resilient.
We then think about the outcome we are trying to produce for the overall basket of funds and its potential for downside protection. That is our broad thinking around alternatives.