CAIA Blog: Liquid Alt Juggernauts - Worth Their Salt? June 2021
June 2021 - Managed Futures
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One of the most perplexing questions in the investment industry is why liquid alternatives have not been able to disrupt the hedge fund industry in the same way that ETFs have captured significant market share from mutual funds.
Neither hedge funds nor mutual funds have created much value as measured by their alpha generation in recent years, which is primarily explained by high fees eating away any excess returns generated by the fund managers. Liquid alternatives tend to feature lower management and zero performance fees, which should be a more attractive value proposition for investors seeking alternatives.
In addition, hedge funds represent unregulated vehicles that require plenty of costly initial due diligence and ongoing monitoring, compared to liquid alternative mutual funds that are traded on regulated US exchanges.
Despite all these good arguments, the total assets under management in liquid alternative mutual funds were approximately $400 billion in the US in 2020, which is just barely more than 10% of the assets of the $3.6 trillion hedge fund industry. Why has the disruption failed?
In order to evaluate the lack of interest in liquid alternative mutual funds, we will analyze the 10 largest ones in the US.
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