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The Debate on Liquid Alternatives Continues

It is no secret that liquid alternatives have increasingly gained more traction in the hedge fund industry. However, many have been reluctant to make the jump in the space for several reasons. At this month’s EisnerAmper breakfast series solely for fund managers and investors, a quartet of panelists debated the pros and cons. They included:

  • Kristina Labermeier, Vice President, Portfolio Management, Hatteras Funds
  • Sanford Brown, Managing Director, Alternative Investment Group
  • Mike Jarzyna, Chief Investment Officer, Stone Toro Asset Management
  • Nick Markola, Managing Director, Director of Research, Fieldpoint Private

Pros

  1. Transparency and liquidity: They are greater in liquid alternatives than limited partnership (“LP”) structures.
  2. Retail investor access to alternatives: Retail investors now have a way to access alternatives. 
  3. Robust growth: Liquid alternatives have garnered massive inflows due to allocations from registered investment advisors (“RIAs”), wirehouses, and broker-dealers, among others. 
  4. Diversification: Managers can boast a diverse product lineup between liquid alternatives and their LP structure. 
  5. Competitive fees: Liquid alternatives offerings have lower fees than LP structures.

Cons

  1. Consider your investment strategy: Not all hedge fund strategies are viable in a ’40 Act format.
  2. Capacity-constraints: Many hedge fund managers are capacity-constrained.
  3. Talent: Investors feel there is better talent in the LP space vs. liquid alternatives space. A lot of hedge funds entered the space since they struggled to raise assets in the LP structure. 
  4. Hefty cost: Liquid alternatives carry hidden fees and carry a whole new set of expenses for the investment manager.
  5. Skin in the game: If investment managers won’t put their own money into liquid alternatives funds for those abovementioned reasons, there is no way they would launch such offerings for their clients.

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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