Today’s Liquid Alts Are A Terrible Deal For Investors
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Managers of liquid alts have promised strong returns, low market correlation and better risk/return than typical stock and bond managers. Investors have been disappointed, seeing returns that barely beat cash over decades. Despite this poor performance, managers have pocketed roughly 300bps of fees each year. That makes the nearly $100bln AUM liquid alts products the most unbalanced in favor of managers versus investors across the financial industry.
The chart below shows the cumulative returns of the Wilshire Liquid Alts Index, which includes the ongoing management fees in the products. Investors in these products also pay high load fees, so we have included a line which estimates the annualized drag. Once all fees are considered, investors are getting returns on par with cash.
Investors are seeing terrible results because the meager returns generated by these managers are being eaten up in fees. In aggregate these managers are taking almost 2x the alpha that they are generating. This take rate is much worse for investors than even the hedge fund industry.
Finding the top funds also doesn’t get close to just passively holding the stock market. The returns and sharpe ratio of the top 10% liquid alts funds is well below that of just a passive holding in the broad US stock market over the last decade once all fees are included.
Liquid alts products favor the manager over the investor more than any other products in the investment landscape. These managers take multiples of the alpha they generate. At Unlimited, we believe that the investor should take the vast majority of the alpha. By using our return replication technology we are able to create liquid index products that replicate the high quality returns of 2&20 managers with a fee structure where investors keep most of the alpha. We look forward to a world when investors in these products no longer face such a bad deal.