‘Liquid alts’, as they are known, are attracting increasing interest – both good and bad. Within the category is the full range: hedge funds, private equity, infrastructure and property. Throw in a few other real and unreal assets. It’s a grab bag; but they are ‘liquid’.
Liquidity became a big issue after the global financial crisis. Alternatives performed relatively well in 2008 and 2009, perhaps because they tended to be less liquid, and 40-Act versions of them proliferated in the US subsequently. 40-Act mutual funds are those which satisfy certain criteria that allow hedge-fund and other alternatives strategies to comply with the general mutual funds regulations.
They have slowly migrated to Australia over the past two-three years. The Australian chapter of the Chartered Alternative Investment Analyst Association (CAIA), an alternatives version of the Certified Financial Analysts Societies, held a briefing on liquid private equity (PE) investments in Sydney last week.
CAIA Australia, a part of the global educational body focusing on the management of alternative investments, is coming up for its third anniversary in Australia. The chapter has been increasing its profile and events program.
The good part about liquid alternatives is that they open up new strategies to a wholesale and retail sector which has largely been excluded from the benefits they can provide to a portfolio. These include better risk controls, especially downside risk, and potentially enhanced returns.
The bad part is that to make these strategies liquid they usually have to give up something. They have given up the liquidity premium, for sure, but maybe they have given up other aspects of their portfolio, too. Maybe they cannot invest across the full universe that their less-liquid counterparts can. And maybe the wholesale and retail investors do not fully appreciate this.
According to Travis Schoenleber, a Sydney-based managing director of Cambridge Associates, and a chapter executive of the CAIA Australia, the industry is in the early days of capturing a private equity premium in the liquid markets.
“From my perspective, if you go into PE just to earn the median return, you will be well compensated,” he said.
Dan Gerard, the head of the ‘advisory solutions’ group for State Street Exchange in Asia Pacific, which creates bespoke solutions and investable models for big investors, spoke to his recent paper, ‘The Components of Private Equity Performance: Implications for Portfolio Choice’. In this he and the SSGX researchers outline various ways that managers can replicate the risk/return characteristics of PE without the traditional PE investment lock-ups. Listed markets provided such opportunities, too, he told the Sydney meeting.
Schoenleber said the data from Cambridge Associates, a big asset consulting firm with a strong alternatives assets research capability, was consistent with the State Street analysis.
“It’s an evolution in the world of private equity. It was very different 10 years ago and it will be very different in 10 years’ time. We are seeing [that managers have] the ability to disaggregate various risk premia in private equity.
“Investors will be looking for very differentiated strategies… With liquid alpha, we are in the very early stages of harvesting a premium,” he said.
Nevertheless, a premium is a premium, including the liquidity premium. Gerard said: “No-one invests in private equity for the return from years one to three.”
The CAIA event was hosted by State Street. Moderator was Suzanne Taville, Australian rep for the StepStone PE group. Also participating was Jenny Newmarch, portfolio manager at First State Super.
Greg Bright is publisher of Investor Strategy News (Australia)