In the years since the financial crisis, liquid alternative strategies have seen extraordinary growth: Assets under management have increased fivefold and
the number of new funds has expanded dramatically. Persistently low yields, stretched valuations and slower global growth have reduced return expectations
for most traditional asset classes including stocks and bonds in the years ahead. And as post-crisis correlations across asset classes have grown more
unstable, investors have often struggled to find effective portfolio diversifiers within traditional asset classes.
Faced with these challenges, individual investors increasingly have embraced alternative strategies, long recognized by large institutional investors as an
integral part of a diversified portfolio. Today a range of investors can access these strategies in more liquid vehicles through an expanding array of
mutual funds and exchange-traded funds (ETFs).
As the name suggests, liquid alternatives are investments that exhibit modest to low correlation with traditional stock and bond investments and are
typically available in broadly accessible investment vehicles offering daily liquidity, most commonly mutual funds and ETFs.
Defining liquid alternatives
Amid the multitude of strategies, defining liquid alternatives precisely isn’t simple. At PIMCO, we take a broad view: We define liquid alternatives as
investments that exhibit modest to low correlation with traditional stock and bond investments and are accessible in broadly available investment vehicles
that are without the principal lock-ups of traditional private equity funds and hedge funds. The term “liquid” therefore refers to the vehicle, not the
underlying investment (which may or may not be liquid).
We further divide liquid alternatives into two major categories: alternative asset classes and alternative investment strategies. In both cases these
investments tend to exhibit modest to low correlations with traditional stocks and bonds, but alternative asset classes and alternative investment
strategies can be effective diversifiers for distinctly different reasons.
Alternative asset classes
, such as commodities and emerging market currencies, provide exposure to alternative risk premia whose returns are driven by different economic
drivers than traditional portfolios. Alternative Asset Class Strategies:
- Bear market strategies are structured to provide attractive beta-hedging (or outright short) exposure.
- Commodity and real estate-linked strategies are tied to the performance of “real assets,” such as commodities and real estate.
- Currency strategies are designed to provide structural exposure to foreign currencies, in both developed and emerging markets, based on
macroeconomic views and valuation analyses.
Alternative investment strategies
, on the other hand, are typically actively managed and not constrained by traditional benchmarks. These strategies may provide diversification through
the manager’s individual security selection (or active management alpha), with much less reliance on broad stock and bond exposures to deliver returns.
Examples of alternative strategies include absolute return fixed income, equity long/short and managed futures.
- Equity market-neutral strategies seek to provide limited equity beta by taking equal long and short positions, thereby isolating the
alpha component of an equity strategy.
- Long/short equity strategies are designed to provide variable equity exposure while allowing for broader management of market risk
and/or the ability to benefit from short exposure with improved downside risk mitigation.
- Multi-alternative strategies seek attractive risk-adjusted returns with modest volatility and limited downside potential by allocating
across a broad range of absolute-return oriented strategies.
- Managed futures strategies seek to generate positive returns by capturing price trends across major asset classes and have historically
provided diversification to a traditional portfolio of stocks and bonds, especially during times of market stress.
- Nontraditional bond strategies seek positive returns across all market environments by investing across global fixed income markets,
often using a broad range of instruments; results are achieved through a combination of active management and trading expertise.
PIMCO has been managing liquid alternative investments for well over a decade. We offer a full suite of liquid alternative strategies, and, according to Morningstar data, we are the largest provider of these strategies in the U.S. (as of 30 June 2015, Morningstar Direct,based on Morningstar’s alternative mutual fund categories and assets under management). Please contact your PIMCO representative for more information.