Practical Applications of Liquid Alternative Mutual Funds versus Hedge Funds: Returns, Risk Factors, and Diversification

Practical Applications Summary

In Liquid Alternative Mutual Funds versus Hedge Funds: Returns, Risk Factors, and Diversification from the Summer 2019 issue of The Journal of Alternative Investments, author Jonathan S. Hartley (of Goldman Sachs Asset Management) compares liquid alternative mutual funds (also known as LAMFs) to hedge funds (HFs). His goal is to determine whether retail investors can get HF-like earnings from LAMFs and thus use LAMFs as an alternative to traditional investments like S&P 500 stock funds. On the upside, LAMFs have lower fees than HFs, are slightly less volatile than HFs, and are liquid. On the downside, LAMFs have earned 1% to 2% less per year than HFs (after taking fees into account) and are less likely to earn enough to justify the investment risks they incur. However, during times of financial crisis like 2001 and 2008, both LAMFs and HFs posted much smaller losses than the S&P500 Index. Therefore, adding LAMFs to an investment portfolio can potentially help investors diversify and gain some protection from market losses.

TOPICS: Exchange-traded funds and applications, real assets/alternative investments/private equity, risk management, performance measurement