Liquid Alternative Investments for Ordinary Investors

Barron’s did a nice special report this week on AQR’s liquid alternative investments. AQR, which is run by Cliff Asness, John Liew and David Kabiller, is a pioneer in the liquid alternatives space and manages an impressive $141 billion in assets. They also happen to be a competitor of mine. My partner, Dr. Phillip Guerra, has developed an entire suite of liquid alternative strategies based on many of the same principles used by AQR.

As Barron’s writes,

Since U.S. stocks peaked in July, few investments have produced strong returns. Global stocks, junk bonds, and most commodities have declined—in many cases, sharply. And many so-called alternative investments have failed to provide hoped-for diversification benefits. Just look at the big losses suffered by some notable hedge funds.

The situation hasn’t been much better among liquid alternatives, or mutual funds that use hedge fund strategies such as merger and convertible arbitrage, long/short equity, and trend-following in futures markets. Yet, against this tough backdrop, a bunch of academics are delivering. Their firm, AQR Capital Management (AQR stands for applied quantitative research), is a distinctive investment manager that seeks to translate academic insights about finance and the markets—such as the appeal of value and momentum investing—into winning quantitative strategies for institutional and retail buyers…

Indeed, the stock market selloff since the start of this year has shaped up as a key test of whether liquid alts can deliver the promised diversification and protect investors during downturns. Liquid-alt funds have been rightly criticized for generally disappointing returns during the recent bull market—and high fees, to boot.

During a raging bull market, alternative strategies will almost always underperform… as will most traditional long-only active managers. It makes sense to dump every last cent into an S&P 500 index fund and be done. But the kind of market we’ve experienced since 2009 isn’t normal. It was a product of low valuations following the 2008 meltdown and the loosest monetary policy in history from the Fed. But with the market now in expensive territory and with the Fed’s easy money policies slowly on the way out, an alternative strategy makes all the sense in the world, at least with a portion of your portfolio. You want returns that are uncorrelated to the market. You’re not betting against the market, mind you. You’re just looking for something that marches to the beat of its own drum.

I like what AQR is doing. But there’s a big problem with it: While they advertise that their alternative funds are liquid, they are all but unattainable for the vast majority of investors. The minimum investment on many of their mutual funds is as high as $1 million.

We can do it better. With an investment of just $100,000 (and actually less with our robo-advisor option), we can execute a comparable strategy and do so with far lower fees.

To see how our results stack up against AQR and the rest, take a look here.

I’m a big believer in the benefits of a long-term buy-and-hold strategy, particularly for younger investors. But I’m also realistic and realize fully that a long-only strategy will go through long periods of underperformance. From 1968 to 1982 — a period of 14 years — long-only investors in U.S. stocks wouldn’t have earned a single red cent.

Now, I have no way of knowing if we are about to enter a long dry spell like that. But if you are in or near retirement, doesn’t it make sense to have at least a portion of your portfolio in a strategy that zigs when the market zags?

If you’d like to hear more about our liquid alternative options, contact my office today.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

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