By Dan Simon, Markets Media Correspondent
In 2013 there was $100B of inflows into open-ended mutual funds tagged ‘Alternative’ by Morningstar. The compound annual growth rate was 43% over the past five years, and Morningstar predicts 40 Act alternative mutual funds & exchange-traded funds will about triple from $368 billion in 2013 to $1.2 trillion AUM by 2018.
We sat down with Evan Rapoport, CEO of HedgeCoVest, an all-access hedge fund investment platform that enables retail investors to sync their brokerage accounts with alternative funds, to discuss the rise of liquid alts and the alternatives industry more broadly.
1.The asset growth in liquid 'alts' has been tremendous - do you believe this will continue?
Evan Rapoport
Yes, I believe the appetite for liquid alternatives will increase, specifically as market volatility increases and access to these products becomes more widespread. Alternative investments have outperformed the broader market indices over the first quarter of this year, and I believe this trend will continue as we enter a period of more market uncertainty. All investors, in my opinion, need to have alternative investment products within their portfolios to mitigate some of the broader market risk while providing alpha that is not generated by passively managed portfolios.
2. Are retail investors are prepared for alternative investing?
Yes. While there is certainly still some 'hedgeducation' that needs to be done, I believe that the current way that liquid alternatives are being packaged via mutual fund structures, ETFs and separately managed accounts makes it much easier for retail investors to understand these products, take advantage of their benefits, and do so in a safe and secure way.
3. How can alternative investments play a role in a retail portfolio?
Most investors have the majority of their portfolios invested in stocks and bonds with little to no exposure to alternatives. Alternative investments utilize various strategies with differentiated risk profiles and return streams. Alternatives potentially enhance overall returns while dampening volatility when combined with traditional investments in stocks and bonds.
4. What innovative new liquid alts channels do you think will emerge, outside of mutual funds for example?
I do believe that Active/Alternative ETFs will end up supplanting the current alternative mutual funds market. Since a portion of these ETFs can be dynamically traded, these ETFs allow active management for a lesser fee than a mutual fund with much more liquidity. With less than $5 billion in active ETFs currently compared to $350 billion in alternative mutual funds, Active/Alternative ETFs have room to grow.
5. Which managers or sectors are outperforming?
Healthcare funds are having an exceptionally good quarter. The HedgeCoVest Healthcare long/short index, which chooses high conviction names within the Healthcare sector across HedgeCoVest's managers, is up over 24% so far this year.
