Alternatives and ETFs, a match made in heaven?

George Geddes

a cloud of smoke

Investors have been increasing their exposure to alternative asset classes for the last 20 years in an effort to diversify portfolios which has come hand-in-hand with the rise of ETFs but do the two trends make the perfect match?

ETFs have become a source of long-term and core investment exposure for institutional investors over the last decade, with fixed income being the asset class of choice in 2019, however, liquid alternative ETFs have only managed to attract $47bn in assets, according to a report from Greenwich Associates (GA).

The report, named Liquid alternative ETFs: The next frontier in institutional investing, says there is potential for significant growth in assets for liquid alt ETFs as they only account for, on average, 3% of institutions' portfolios that use the products.

A survey carried out by GA found the biggest benefits of liquid alternative ETFs are its liquidity and portfolio diversification. Additionally, the vast majority (85%) of respondents said the main application of the investment vehicle is to transition management.

Liquid alt ETFs are also used to obtain strategic investment exposures as part of alpha/beta separation strategies. Some 57% of current public fund investors and half of the corporate funds use this strategy as “you need pretty strong liquidity”, according to one respondent.

“It allows you to manage your cash more effectively if your assets are liquid as well,” they continued.

A look at alternatives

GA questioned the institutions on how and why they incorporate liquid alt funds into their portfolios and found a common theme that regularly occurred was their tax and cost-efficiency benefits. Investors also use the funds to take advantage of their bond-like characteristics without the bond price tag.

Nearly a fifth of respondents that do not use liquid alt ETFs say they are considering incorporating them into their portfolios over the next 12 months. GA forecasts total assets will more than double over that time frame from $47bn currently to $114bn in a year’s time.

For this significant growth, more education needs to be provided about these niche investment vehicles as the top reason for not using liquid alt ETFs is because they are unfamiliar with the structure.

GA is under the impression that a large number of these investors will at least experiment with liquid alt ETFs when given the opportunity.

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