Earlier in the year we analyzed liquid alternatives’ performance in the fourth quarter of 2016.
The most striking finding was that despite modest returns, they were largely in the black against the backdrop of a savage quarter for fixed income. And that was not all: the volatility investors were exposed to in these fledgling peer groups was below treasuries over the longer term.
This is a long-term risk/reward pattern that is comparable to, if not better than, the defensive end of fixed income.
This year has been much kinder to virtually all asset classes, and fixed income has rebounded on the heightened growth expectations that accompanied Donald Trump’s election win.
Despite these fairer winds it is alternatives again that have done best among the most risk-averse parts of the fixed income market. All but the Market Neutral and Managed Futures categories have outperformed treasuries, treasury inflation-protected securities and mortgage-backed securities markets in the first seven months of the year.
Municipal Bonds are the outlier here, with the category shaking off much of the late 2016 sell-off and posting an impressive 4.4% return for the year to the end of July.
The Global Bonds category is an oddity; the weakened dollar has added significant amounts to returns and resulted in the peer group outperforming high yield for dollar investors. It's even getting close to hard currency emerging market debt.
It is for the same reason that the Currency liquid alts sector has shot up an impressive 4.4%. So much for currency investment’s reputation as a boring zero-sum game. While such excitement may not last too long, currency movements have been an impressive source of returns in recent years.
Bond Strategies funds continue to do the business too, maintaining their low correlations and volatilities and delivering solid returns (3.73% this year) whatever the climate. The sector came in fifth behind Currency, Funds of Funds and the big two: Long/Short Equity and Global Macro. These are up 5.3% and 4.97% respectively.
Not feeling the love
These two categories' returns fall some way short of equity markets this year, but can you really expect them to keep pace with the rally? More importantly, would you even want them to?
The curious thing here is that investor interest in these two sectors could not be more different.
Long/Short is seen as the poster child of alternatives, and sure enough it tops the inflow chart this year, with these funds taking in $2.6 billion. Meanwhile, Global Macro sits in last place – a position it has unfortunately made its own – with $1.8 billion being pulled from funds.
All of the data, though, points to a competitive set of categories that offer something different.
The problem is that unless the money follows, groups may start abandoning their offerings and cut and run, leaving investors without these diversifiers.