Morningstar Weighs In On Alts

Morningstar wrote an article asking Did Liquid Alternatives Pass The Stress Test, with the context being the current, tariff induced event.

The first point that I try to be consistent with is that if you don't believe in using alternatives, don't use them, this is not a pitch, more on that at the end. 

Should gold be considered an alt? They don't list it but other than one day, it has really worked well through this event. If you own any funds that track those respective categories, your milage may vary. Long short equity is interesting because there are several different ways to implement it. 

Those are the three long short funds we use for blogging purposes compared to the S&P 500 and of course BTAL is a client and personal holding. The context we use for this space both for the blog and then for clients IRL is to hopefully smooth out the ride. That is the expectation I have for BTAL and between the other two BIVIX seems like it sort of does what BTAL does but not exactly and QLEIX can do what BTAL does but it is more of a does its own thing type of alt which can absolutely play a role in a diversified portfolio. 

Speaking of a does it's own thing type of alt, a macro that I have in my ownership universe was doing very well  coming into last week but then got cracked. This particular fund's long term track record for consistently doing well and being uncorrelated is outstanding but the combination of cross market dynamics made it a bad week for that fund, which can happen of course. It was up 4% versus down 7% for the S&P 500 from February 18th going into last Monday.

A couple of different horizontal line alts that tilt upwards have been doing what they should, one dropped 3% one day but is started to claw that back and shows down 0.3% since Feb 19. It's role is to smooth out the ride in a different manner than BTAL and I feel like unch pretty much accomplishes that objective. One of the two horizontal line alts I'm talking about is merger arb which is up slightly. 

Skipping long short on the table, other than the mention above, the worst performer was trend/managed futures. My hunch is the long short category takes in funds that are not really alts like the three noted above, and so trend to my way of thinking has been the worst of the lot. 

Obviously, I've written a ton of posts saying how great managed futures is as a diversifier but to keep allocations small because you never know when the one event will come along where it won't work. It is just funny timing that in the first real test after 2022, they're not "working." 

When I talk about diversifying your diversifiers, I am talking about a couple of different things. Yes, different strategies is one thing. If a portfolio is 55% equities, 35% long bonds and 15% managed futures, it probably hasn't gotten any protection from this decline. But I also mean diversifying expected outcomes. 

If everything is going right with merger arb, it will be up slightly with no volatility. That's great as a piece of the portfolio but may not be sufficient to protect against what the market has gone through over the last couple of months. If everything is going well for BTAL, it will be up a lot when stocks are down a lot but over a longer flatter period it might have some bleed although I would note it has compounded positively over the last ten years.

We could go on like this with all of them so I will spare everyone that but the plight of managed futures makes another point about not every strategy always working. Managed futures was heroic last time and people piled in, chasing that massive outperformance. Don't pile in to anything and don't give up on something that you have a basis to believe can work after the one time it doesn't.

And speaking of a pitch, an article from Barron's that reads like an AI-written paid placement for alts that I won't link to but one of the comments was gold. "So many real estate ALT non-traded investments put out prior to COVID are now disasters and my clients can't get out! I'ts cost me 3 accounts and $9 million in assets." I can't be certain, but I imagine whatever he is talking about resulted in a glorious payday for him. And what portion did he have in those non-traded REITs? I'm guessing a lot. 

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