One Way To Survive Higher Interest Rates

July 17, 2014

With higher bond yields looming, using more ‘liquid alternatives’ may be one effective way to cope.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.

Alternative investing has just about become a household name as more investors have gained access to alternatives.

Most alternative investment assets are still held by institutional investors or by accredited, high net worth individuals and, according to Preqin, now total $6 trillion.

However, in the last several years, alternative strategies have exploded into the retail marketplace. This growth has resulted in a wide variety of hedge-fund-type strategies being available through mutual funds and ETFs that are dubbed “liquid alternatives.”

Retail investors and asset managers now have access to managed futures, market-neutral, long/short equity, fixed income and many other strategies in a mutual fund wrapper—the same strategies institutional investors and endowments have been using for years.

In our view, access to these strategies via liquid vehicles provides advisors and investors with the tools needed to build better portfolios.

However, a liquid structure creates some trade-offs. Since underlying investments need to be liquid, liquid alternatives cannot invest in some of the less liquid instruments that have historically generated high returns in hedge funds. They also cannot use the same amount of leverage to goose returns.

On the other hand, liquid alternatives typically offer a number of appealing features, such as daily liquidity, lower minimum investments, transparency, lower fees and 1099 tax reporting instead of K-1s associated with futures-based investments. The trend of investing in alternative asset classes via liquid strategies has caught on.

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