Fidelity Investments recently announced the launch of two new liquid alt funds, Fidelity Advisor Macro Opportunities Fund ($FAQFX) and Fidelity Advisor Risk Parity Fund ($FAPZX).
Liquid alts saw record inflows in 2021, totaling over $38 billion. Fidelity’s new funds are just the latest in a string of offerings from asset managers looking to get in on the action. This year through May, liquid alts have seen over $21 billion in inflows.
But what exactly are liquid alts, and how do they differ from their illiquid counterparts?
Liquid alts are mutual funds or ETFs that provide diversification and downside protection through exposure to alternative investments. Unlike traditional alts, which can only be bought and sold on specific dates or after a holding period, liquid alts can be bought and sold daily. This makes them much more accessible to retail investors, who often can’t meet the large minimum investment requirements, or the accredited investor status needed to invest in traditional alts.
Private equity funds, for instance, often come with $25 million minimum investment requirements and 10-year holding periods. Investors also must be accredited, meaning they have a net worth of $1 million or an annual income of $200,000. By contrast, liquid alt funds often have no purchase minimums, retail share classes, and daily liquidity.
Concerns with liquid alts
Liquid alts addressed some of the criticisms of traditional hedge funds, namely high fees and a lack of liquidity, while providing diversification and upside potential. Retail investors seek alternative investments as we enter a low-yield environment with rising interest rates and sky-high inflation fears.
Liquid alts, however, are no panacea. For one, there is the risk that a liquid alt fund will not be able to replicate the performance of its illiquid counterpart. This is because, by definition, liquid alts are less invested in actual alternative assets and more exposed to public markets.
The illiquidity of hedge funds also protects redemptions, as investors can only pull their money out on specific dates or after a holding period. This is not the case with liquid alts, which can be redeemed daily. Selling pressure from redemptions can lead to forced selling and fire-sale prices, leading to lower returns for investors.
Some funds in the liquid alts category are down 10% yearly, and retail investors aren’t known for their patience. They tend to chase performance and quickly pull the plug when things go south. This can lead to even more volatility for liquid alt funds.
Liquid alts strategies
Liquid alts funds come in various flavors, with strategies designed to provide diversification and downside protection. Some popular strategies include long-short equity, nontraditional bonds, market neutral, managed futures, multi-alternative, bear-market, and multi-currency.
Equity market-neutral funds, like the AGFiQ US Market Neutral Anti-Beta Fund ($BTAL), seek to provide exposure to the equity market while hedging out the beta or market risk. The fund does this by taking long positions in stocks that are expected to outperform the market, such as H&R Block, and short positions in stocks that are expected to underperform, such as Block and Upwork.
Fidelity’s new Advisor Macro Opportunities Fund is an active management fund that can go long or short, aiming to achieve returns through skill and active allocation.
Takeaways
Investors should understand that liquid alts are not a silver bullet. They come with risks and challenges, but they can be helpful for diversification and downside protection. Investors should carefully evaluate the fund’s strategy, fees, and performance when considering a liquid alt fund.