Alternative investments, or simply alternatives, have become buzzwords in the industry, namely for their perceived benefits beyond traditional stocks and bonds. Alternatives range from highly liquid commodities to hedge funds and even nontraded vehicles that may not be investments at all. Not all investments can fit into the exchange-traded fund (ETF) wrapper; however, a subset of these alternatives dubbed “liquid alternatives” has seen a wave of issuance and growth in the ETF space. These typically include strategies such as managed futures, long/short, merger arbitrage and multistrategy funds, among others.
Many of these ETFs have come under scrutiny for their lack of effectiveness or liquidity. But if you stick to what I call the “three C’s of liquid alts” – correlation, comprehension, and cost – then you and your clients will likely have a better experience with alternative ETFs.