What are liquid alternatives?

blank mind map or flowchart on blackboardWith current market forces leading to alternatives adoption in the mutual fund space, the definition and classification of what exactly constitutes a liquid alternative has become a much-discussed question in the fund industry.

NICSA addressed this question, as well as others, at its recent NICSA Liquid Alternatives Conference, held on April 22, 2014 in New York-New Jersey.  In her keynote presentation, Sandra Testani, CFA, CAIA Director of Alternatives Product Management for Alliance Bernstein outlined some of the characteristics that define liquid alternatives.

  • Liquid alternatives are asset classes or investment strategies that can be offered in mutual fund form
  • Liquidity – liquid alternatives have daily liquidity and daily valuation
  • Pricing – Daily NAV
  • Taxes – 1099 income with required delivery by January 31 (big selling point for these strategies)
  • Availability – available to most investors – no net worth or qualified purchasers
  • Minimums – Fund minimums and fees are lower than hedge funds, typically under $10,000
  • Fees – Typically higher than traditional mutual funds but lower than hedge funds
  • Use of Leverage – Limited to 33% of assets
  • Regulation – Subject to 1940-Act, Independent board

Morningstar has evolved its classifications to capture the new funds but industry definitions continue to evolve.  One of the biggest challenges is that alternatives are not a homogenous asset class – making it difficult for financial advisors to understand and explain them to customers.  But as more and more investors become aware of the availability of these funds, the trend of growth in this emerging market is likely to continue.

For more information on liquid alternatives, visit the NICSA Knowledge Center.

NICSA: 8400 Westpark Drive, 2nd Floor McLean, VA 22102 • Tel: 508.485.1500 • Fax: 508.485.1560