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Liquid alternative funds are still relatively young but have nearly $500 billion in assets globally as of May 2021. However, investors still lack awareness of these funds' challenges and risks and often fail to form realistic expectations for them. Chasing performance has been rampant, causing wild swings in asset flows among funds and in and out of the asset class.

Source: Morningstar.com

Key Takeaways

× The 2020 returns for the Credit Suisse Liquid Alternative Index were the strongest since 2009.

× This has led to inflows for liquid alternatives, particularly within the United States, to levels not seen since 2013.

× New hedge fund launches are once again exceeding liquidations and are revitalizing the sector. The new generation of liquid alternative strategies has learned from the many challenges of the first wave.

× The market environment may finally be conducive to these strategies' performance in isolation and as part of a 60/40 portfolio.

× Investors must set realistic expectations for these strategies. Viewing strategies within larger cohorts of "modifiers," "diversifiers," and "opportunistic" can help form those expectations.

× Manager selection is crucial for liquid alternatives. The revamped Morningstar Category methodology can assist in the selection of top-quintile investment managers.

Strategy grouping

Source: Morningstar.com
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