What Are Liquid Alternatives & Should You Invest In Them?

by Anthony Zhang

Liquid alternatives are mutual fund or exchange traded fund (ETF) assets that invest in a broad range of alternative investments.

Unlike illiquid alternative investments like private equity and real estate, liquid alternative investments can be bought and sold daily, offering a perfect opportunity for portfolio diversification.

Almost all liquid alternative funds were created after the 2008 global financial crisis. The hope was to protect everyday investors’ portfolios, just as a hedge fund covered an institutional investor.

Let’s discover all about liquid alternatives - why you should invest in alternative mutual funds, the various liquid alternative investment strategies, and a few things to consider before investing.

We’ll also explore how fine wine makes an excellent alternative to liquid alternatives.

Why Should You Invest In Liquid Alternatives?

Here are a few reasons liquid alternatives can be a healthy choice for your investment portfolio.

Liquid alternatives offer daily liquidity, far more than a hedge fund, which helps limit the impact of significant market downturns.
They come with lower minimum investments than hedge fund assets.
Alternative mutual funds have a low correlation to traditional investments, which means they usually move counter to the stock and bond markets. It helps in the diversification of your traditional portfolio and limits the risk of investing in the volatile stock market.
Mutual fund and Exchange traded fund investments offer complete transparency to investors. So, you can review your fund holdings and portfolio performance anytime.
Since these alternative investment assets are publicly traded funds, liquid alts are SEC-registered, and FCA (Financial Conduct Authority) regulated, which keeps your investments safe.

Now that you know why liquid alternatives can make an excellent addition to your portfolio, let’s look at some liquid alternative investment strategies.

Liquid Alternative Strategies And Sub-Categories

There are over 10 different categories of liquid alternative strategies. However, over 80% of the funds are classified under five main categories.

Long-short equity: Long-short equity investment strategy concentrates on equity securities and derivatives. It seeks a long position in underpriced stocks while selling short overpriced shares.
Non-traditional bond: This liquid alternative strategy pursues unconventional strategies for bond investing to gain absolute returns. A large subset of this category is "unconstrained" funds that offer a high degree of flexibility by taking positions in high-yield foreign debt with large allocations.
Market neutral: Market neutral fund seeks to minimize the systematic risk arising from overexposure to specific sectors, countries, or currencies.
Managed futures: The managed futures strategy includes investing primarily in futures contracts through an experienced professional.
Multi-alternative: This strategy combines two or more alternative investment strategies to minimize market risk. It gives you the freedom to be flexible and change your investment strategy depending on market developments.

Other popular liquid alternative strategies include:

Event-Driven
Equity Hedge
Relative Value
Global Macro Trading
Options Trading
Relative Value Arbitrage
Systematic Trend

Most of these strategies are parallel to hedge fund strategies. Consulting hedge fund managers would also give you a deeper understanding of these strategies.

But:

Is investing in liquid alts as rewarding as it seems?

Things to Consider While Investing in Liquid Alternatives

In the 2010s, the average annualized gain of the liquid alternative fund was 1.66%, which placed them behind most fund categories.

So, before you put your money in the liquid alternative fund, here are a few things to consider:

According to the critics, liquid alt fund investments will not hold up in more trying market conditions.
The fee for managing liquid alternatives is relatively high compared to conventional mutual funds, which decreases the overall value of your returns.
Following 2015, the liquid alternatives market has seen an influx of fund closures and consolidations, which resulted in a slowed growth.
In the long term, investing in a liquid alt fund may backfire since you’re be stuffing illiquid alternative investments in liquid packaging. Of the 453 liquid alternatives funds launched since 2009, only 153 exist today - that’s a 34% survival rate over 12.5 years.

Even though liquid alternative fund investments are often marketed as hedge fund investments, many traditional hedge fund strategies aren’t applicable for liquid alts. This adds an added constraint on liquid alternative fund investment.

Before investing in liquid alts (or any other investment products), it is best to consult a professional asset manager with proven experience in the hedge fund industry. Ensure you get the best investment advice and set a clear investment objective before dedicating to liquid alts.

What if we tell you there’s a safe and rewardingalternative investment to protect your investment against the volatility of the stock market, low interest rates, and rising inflation?

Fine Wine: A Fine Alternative to Liquid Alternatives

Fine wine is a tangible asset class typically characterized by low volatility and liquidity than traditional asset classes like stocks and fixed income bonds.

Fine wine’s reduced liquidity protects your investment during panic selling - making it a great alternative investment option for individual investors as well as institutional investors.

While stock markets worldwide crashed during the 2020 COVID-19 pandemic, the fine wine market experienced stable growth. On average, the top investment wines saw a 20% increase in their prices.

Additionally, the fine wine market continuously outperforms inflation. In 2021, the fine wine industry witnessed an average growth of 23%, while the annual inflation rate in the U.S. was around 5%.

The best part?

You can start investing in fine wine with as little as $1,000 - from the comfort of your home!

Vinovest, a world-class online wineinvestmentcompany, helps you buy and sell rare, authentic wines from around the world and store them in temperature-controlled bonded warehouses.

All you need to do is;

Sign up
Fill out a quick questionnaire to determine your risk tolerance and investment preferences.
Fund your account (minimum $1,000.)
Start building a rewarding wine investment portfolio.

Vinovest’s team of wine experts ensures the provenance of your bottle, insures it, and tracks your portfolio so you can earn maximum returns. Usually, investment-grade wines need to be stored for 5-10 years before they can turn a profit.

Vinovest offers you 100% liquidity. Whether you want to sell your buyer or drink it yourself, Vinovest will get your bottle to your buyer or you. The process takes around 2-3 weeks.

Vinovest will also help you find a buyer through its vast network.

All of this at a minimal annual fee of 2.5% (1.9% for a portfolio of $50,000 and above and only 2% for registered investment advisors, family office, and institutional investors.)