Exchange-traded funds could deliver returns similar to traditional hedge funds, where more than $2 trillion is currently invested, but at a fraction of the cost — by using hedge fund replication and liquid alternatives, according to WealthManagement.com.
How do Alternative ETFs Compares to Traditional Hedge Funds?
Hedge funds diversify a portfolio, but aren’t available to many investors due to long lockups and high minimums, Yasmin Dahya, head of the Americas Beta Specialist team at J.P. Morgan Asset Management, tells the publication.
However, there is a portion of the hedge fund market where factor-driven strategies can be used, which means alternative ETFs can offer similar returns in a low-cost, more liquid form, Dahya tells WealthManagement.com. Liquid alternatives allow investment outside of traditional asset classes, which is crucial in the current environment due to its high equity valuations and challenging bond market, she tells the publication.
There is a significant difference in how managers use factor-based strategies for alternative investments, so advisors should check managers’ experience, research processes and portfolio construction, especially concentration risk, Dayha tells WealthManagement.com. Furthermore, advisors should research how a manager uses cash to fund the long/short strategies that most alternative ETFs use and maintain collateral to withstand a volatile market, she tells the publication.
As the market has grown with little volatility over the past nine years, a hedged strategy has been unnecessary, but Dahya believes that now is a good time to find a diversified source of returns, she tells WealthManagement.com. Clients are looking for low-cost products with differentiated returns, and this is the market for liquid alternative ETFs, Dahya tells the publication.
In order for factor-driven alternative ETFs to grow as a market, investors must be educated on what factors are and how they work, she tells WealthManagement.com. Furthermore, advisors need technology to examine the factors that are already in their portfolios in order to stop clients worrying about investing in new factors, Dahya tells the publication.
Alternative ETFs attract asset allocators who wish to diversify, as well as investors who exclusively deal in ETFs but want alternatives in their portfolio, she tells WealthManagement.com. Furthermore, some smaller accounts are using alternative ETFs as a “one-ticket solution for diversified alternative exposure,” Dahya tells the publication.
