Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 9

Improving access to liquid alternatives

One of the big criticisms of many alternative investments, particularly for retail investors, is their poor or uncertain liquidity. This was highlighted in the GFC for small and large investors alike, as a range of alternatives funds failed, suspended redemptions, or were difficult to exit at other than significant discounts to full value. As a result, some retail investors remain cautious about alternative investments, demanding greater and more reliable liquidity. Fortunately, the scope for retail investors to access and build portfolios of reliably liquid alternative strategies and assets continues to improve.

First, let’s clarify what we mean by ‘alternative investments’. A simple definition is any investment that is not one of the traditional asset types of cash, bonds and equities. It is broader than simply ‘hedge funds’ and includes precious metals, commodities, private equity and ‘quasi alternatives’ like listed infrastructure and property.

Divergent liquidity preferences

It seems retail investors have developed two broadly divergent preferences regarding liquidity on investment products in the wake of the GFC. On the one hand they desire that the bulk of their investments provide very high liquidity, ideally daily or perhaps weekly. On the other hand, they will accept highly illiquid investments in asset classes they know well, typically with a defined future date for repayment or a liquidity event, such as a property syndicate. Ownership of direct residential and commercial property is another low liquidity asset. Investments that don’t easily fit into these two broad categories from a liquidity perspective are generally being shunned.

The good news is that the ability of retail investors to access liquid alternative investments has  improved in recent years and is allowing portfolios to contain a meaningful allocation to a range of alternative investments while remaining highly liquid. This is occurring at a time when alternative allocations up to 30% are being recommended by some asset consultants and research houses. Of course these liquidity-focused investors are not able to access the extensive universe of alternative asset and strategy opportunities that long term institutional pools of capital such as large super or endowment funds can, but nevertheless the choice is clearly expanding.

Availability of alternatives

Liquid strategies like managed futures have become well accepted by retail investors in recent years as major groups like Winton, Aspect and AHL have entered the market. Long/short equity is increasingly a strategy offered by mainstream and alternative managers with more frequent liquidity than the monthly or quarterly liquidity offered by standard hedge funds. There are also a small number of highly liquid global macro, Tactical Asset Allocation (TAA) funds and commodity-related funds. Other ‘quasi alternative’ categories like listed infrastructure funds have also proliferated in recent years.

Part of this trend to greater liquidity is being driven by the response of hedge funds and fund of hedge funds to the GFC. Hedge fund of funds groups in particular have been forced to totally re-work their offer, especially if they are intending to appeal to retail investors. Many have built managed account structures to access individual hedge funds that allow greater liquidity, transparency and lower cost. The growth of hedge fund beta products (that is, they earn a hedge fund return rather than the return of a specific manager) that offer lower cost and more liquid access to hedge fund diversification benefits has also expanded the retail universe.

Another driver to greater liquidity has been the desire of fund managers to offer their products in the US mutual fund market and European listed markets. These structures require much greater liquidity as well as having restrictions on leverage and compensation arrangements. Managed futures, long short, market neutral equity, merger and event arbitrage as well as more diversified fund offerings such as hedge fund beta and fund of funds are being designed for these markets, and the structures can then be replicated in Australia.

Exchange traded funds (ETFs) are also growing as a way to offer some alternatives despite greater restrictions that this structure offers. For example, precious metal and commodity ETFs have grown rapidly in global markets in recent years, and are readily traded on the ASX.

Another small but often neglected area of liquid alternatives is listed investment companies (LICs). The advantage of this structure is that it can provide daily liquidity to those alternatives strategies that are inherently illiquid via trading on the exchange. Most prominent of these is private equity and debt although some less liquid hedge fund strategies and specialist areas like agriculture and timber have also been offered in this structure.

Of course this structure comes with some limitations, such as less manager choice, occasionally bad governance, and the tendency to trade up and down with the market irrespective of the value of the underlying strategy, which can dilute diversification benefits. Related to this is the tendency of these vehicles to trade at a discount or premium to Net Tangible Assets (NTA), although approached with discipline this can provide opportunities. If investors can be selective regarding manager quality and only buy LICs when they are trading at discounts to realistic NTA and where there are catalysts for that discount to narrow, these vehicles can provide very attractive returns. Such listed fund investments can be valuable satellite holdings or a complement to a broader liquid alternatives portfolio.

Consider as part of a portfolio mix

The liquid alternatives universe is clearly growing and enabling the construction of increasingly robust alternative portfolios for retail investors, something that would have been difficult to achieve just a few years ago. Of course, having a greater array of liquid alternatives to choose from does not necessarily make selecting them or building a portfolio an easy task given the complexity of many alternative assets and strategies. Further, there are many high quality alternatives managers and strategies that are difficult for retail investors to access for reasons other than liquidity, such as those without an Australian presence or operating only through offshore funds. This highlights the role that professionally managed pooled alternative vehicles, even if focused on mostly liquid funds, can provide.

Investors should welcome the greater availability of liquid alternatives, particularly in a world where expected returns over coming years on a range of mainstream assets classes are subdued and the risk-reducing and diversification benefits of a well-selected range of alternative investments are increasingly valued.

 

Dominic McCormick is Chief Investment Officer and Executive Director at Select Asset Management.

 

  •   2 April 2013
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

It’s time for LICs to die

Four options for an income investor’s next dollar

Why gold’s record highs in 2025 differ from prior peaks

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Retirement

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

2026 is not 1999

The US market looks eerily similar to the dot-com era with soaring AI spending and tech giants dominating returns. But one difference separates today’s boom from the dot-com bubble and it could determine what happens next.

Planning

Taxing time for trusts

Trusts are facing a shake-up, but an overhaul may not be necessary. Families can explore restructuring strategies that preserve succession and the asset protection benefits that have made these structures valuable.

Economy

Why the US economy is stronger than you might think

War, inflation and higher rates were expected to derail America. But has the market got it wrong? Three forces are driving the economy beyond expectations, revealing implications for stock prices and portfolio positioning.

Gold

How much trust is in your portfolio?

Everyone talks about diversifying assets. Far fewer think about diversifying trust. As inflation, debt and market assumptions collide, the question is whether portfolios need greater protection from unexpected outcomes.

Retirement

Retirement in reality - 7 months in

Seven months into retirement, I'm still uncovering surprises. This month was spent reflecting on the slow pace of health change, the myth of neatly scheduled part-time work and the unexpected persistence of retirement guilt.

The new geography of technology leadership

The next chapter of technology may not belong to the companies or business models many expect. As the landscape shifts, some opportunities are emerging in places that remain surprisingly overlooked by global markets.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.