Jeff Ptak had an interesting writeup at Morningstar about the number of failed liquid alternative funds as measured by how many of them close.
He says that of the 1,345 alternative mutual funds that existed on Jan 1, 2015, only 341 still trade today. So 75% failed.
The point is worth digging into but the article seems to go back and forth between liquid alts and alts that are not liquid which is a whole different thing.
Part of the story with the closure of so many liquid alternative funds stems from some strategy doing very well causing a surge in demand leading to a bunch of new funds. Then maybe the strategy in question struggles, investor interest wanes, leading to some of the marginal funds, marginal in terms of size, to close. My hunch is what I just described is the exact arc for managed futures. There have been a lot of new funds come out and the space has struggled for years in the past. We may be in the early innings of a multiyear struggle.
The conversation here for years has focused on having the wrong expectations for what specific alts will do and having the wrong portfolio sizing. I tell this story all the time but 20 years ago we talked on the blog about what terrible advice putting 20% into REITs and MLPs was and then sure enough they did not help in the Financial Crisis. The reason was simple to understand ahead of time, in times of turmoil the correlations to equities of those two niches tends to go up. Own REITs and MLPs if you want, just don't count on them to go up in a crisis. Both dropped a lot in the early April panic.
Lately there had been chatter about 20% into managed futures. Again, terrible advice. I don't think there are too many people saying this anymore compared to a couple of years ago though. Managed futures are a fantastic tool but a fantastic tool used incorrectly is going to become a problem. We'll see of course but to the premise of Jeff's article, I would expect to see attrition in the managed futures space.
If you've been reading this blog for a while you probably know I am a big believer in merger arbitrage as an alternative exposure. Client/personal holding the Merger Fund has been around since the early 90's and has over $2 billion in AUM. The other old fund in the space that I am aware has symbol ARBFX, it has been around since 2000 and has $730 million.
To a point Jeff made, there is no hot sales pitch for merger arb. It's boring! That ought have them lining up. There are other merger arb funds but not a lot of them. I don't think the attributes of merger arb lend themselves to a rush of demand so the risk of closure of a specific fund might come down to whether there are enough demand dollars to keep ten of them (not sure the number and Copilot had the wrong answer) in business? The answer might be no but if it is no, I am not worried about the 30+ year old fund with $2 billion being the one to close.
We look at the Absolute Convertible Arbitrage Fund (ARBIX) for blogging purposes but I don't use it for clients. I think this is the only pure convertible arb fund (if you know any others please leave a comment). ADAIX from AQR includes it but that one also has merger arb and event driven. ARBIX has over $1 billion but the fund isn't that old. If it really is a category of one and it has that much AUM, it's not likely to close.
Is risk parity an alternative strategy? There are just four or five funds. Wealthfront had a large one and it closed, presumably due to poor performance. The RPAR ETF has just over $500 million but has done poorly since inception. Invesco has ABRZX which has similarly poor results. Somehow this fund has $900 million in it and has been around for 16 years. AQRIX is an AQR fund that used to have 'risk parity' in the name, it changed its name but is still risk parityish. It has done better than the others but lagged VBAIX but with similar drawdowns to VBAIX along the way.
Three years ago, Fidelity launched Risk Parity with FAPYX. It still only has $11 million in it. A Fidelity fund with $11 million? They can afford to keep it open but if Fidelity can't raise assets in a strategy, there are no more dollars out there looking for risk parity.
I don't think this strategy solves anyone's problem and is vulnerable to closure. Even if you disagree with that, there are other alternative niches that where that description applies.
We've looked a couple of times at the Simplify Multi-QIS Alternative ETF (QIS). Read what QIS is. It's interesting. And very complex. The ETF has $58 million and it "seeks to provide positive absolute returns and income by investing in a diversified portfolio of quantitative strategies chosen to offer an uncorrelated positive source of returns."
No. I don't see how this could stay open. It hasn't done what it said it would do, it's tiny and not only doesn't it solve anyone's problem, I'm not even sure what problem it's attempting to solve.
The point of today's post is to try to frame out what simple clues to look for that a fund might not last beyond low assets. If it doesn't meet the expectation it sets or offer any sort of useful attribute to a portfolio, then odds of closure increase. Jeff talked about faddish funds (my word not his) which is another area that eventually could see attrition. Does anyone buying the 2x Data Dog ETF, seriously, expect to grow old with that one in their portfolio? A lot of levered funds are likely to die off at some point. What about the 10th to market S&P 500 covered call ETF? 20 years ago, there were a ton of covered call closed end funds, most of them are gone. A repeat with some of the ETFs seems like a good bet.
One thing we do here is to try to sift through a lot of product trying to find the few that reliably do what they say with a strategy that reasonably meets a need.
I'll close out with a quick word about the Cliffwater Corporate Lending Interval Fund (CCLFX). The prompt is an interview that Morningstar did with Phil Huber from Cliffwater.
I don't know what to make of Cliffwater's results. Taken at face value, the results are phenomenal. Is the story about how they (don't) mark to market? I don't know. I can't see myself being interested in buying something that is illiquid but the other two portfolios in that backtest, get more than 90% of the return with very little volatility and no gating of funds. Where there are two ways to get close to what Cliffwater has done, there must be other ways too.
Tip of the hat to Eric Balchunas for the word "Terrordome."
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
No comments:
Post a Comment