GSAM: Wide Dispersion Seen Among Liquid Alternatives Last Year

Mar 22 2016 | 10:27pm ET

Liquid alternatives largely performed in-line with their private placement or hedge fund counterparts in 2015, according to Goldman Sachs Asset Management’s 2015 Liquid Alternative MAPS Report.

Following the extraordinary market turbulence during the second half of last year, the wisdom of taking relatively complicated and/or potentially illiquid alternative investment strategies and placing them within publicly traded wrapper has been increasingly questioned.

However, according to Goldman’s research, while absolute performance was underwhelming and return dispersion wide, the company’s five liquid alternative investment (LAI) peer groups - equity long/short, event driven, relative value, tactical trading/macro, and multistrategy - performed well relative to their respective hedge fund industry benchmark indices. 

Key highlights of the report include:

  • One of the five LAI Peer Groups, Relative Value, posted small gains (+1.5%) in 2015, while the other four posted small losses (ranging from -0.4% to -2.0%). However, all five LAI Peer Groups outperformed or performed similarly to the related hedge fund indices last year. 
  • Liquid alt investments exhibited wide performance dispersion in 2015, and within each LAI Peer Group, certain groups of strategies and managers profited
  • Dispersion of returns across liquid alternative funds was very wide in 2015, wider than in previous years, with certain alternative strategies performing particularly well. 
  • Diversification across and within liquid alternative strategies proved important.
  • Within the Equity Long/Short and Relative Value LAI Peer Groups, momentum-oriented managers fared well, while value-driven managers performed poorly. 
  • Within the Tactical Trading/Macro LAI Peer Group, some momentum-based managed futures strategies reached double digit returns, while some credit and energy-heavy global macro funds experienced losses. 
  • The challenges of anticipating which LAI Peer Group or subgroup will fall in and out of favor underscores the importance of diversifying across and within alternative strategies. 
  • Looking ahead, the investment opportunities for liquid alternatives are attractive, noted Goldman in the report, especially in the current environment of low interest rates and high volatility in traditional asset classes. 

GSAM created its LAI Peer Groups as an evaluation framework that boils the wide and varied world of liquid alternatives into a manageable universe of investment vehicles that truly mimic hedge fund strategies. Accordingly, the company believes investors are better served looking at the liquid alt universe through what it terms a “hedge fund lens”, categorizing them into one of five main hedge fund strategies. 

“We believe a categorization framework which mirrors what has been adopted by the hedge fund industry may help investors construct more diversified portfolios and set more realistic risk and return expectations for their LAI allocations,” states the report. “By paring down the LAI universe into hedge fund-like peer groups, we believe that the returns of LAI mutual fund peer groups and the hedge fund indices could be more comparable.” 

As a result of a thorough examination of underlying fund characteristics, GSAM has pared the approximately 680 liquid alternative strategies across 14 categories that are currently available to investors down to 337 funds in five categories. The firm’s research found that all these funds, when allocated to the five LAI Peer Groups, exhibit correlations and betas to traditional stock and bond indices in line with those of comparable hedge fund indices.

Goldman Sachs Asset Management is one of the largest and most experienced alternative investment managers in the world. The firm has 40 years of experience in alternative investing and manages more than $118 billion in alternative investment assets.

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