LIQUID ALTERNATIVES
Liquid Alternatives combine alternative investment strategies with the advantages of liquid investment products. Liquid alternatives include credit strategies, ETF’s, UCIT’s and Hedge Funds. In recent years, liquid alternatives have gained importance in the view of institutional investors. They can be an important part of a broadly diversified portfolio with a respectable risk-return profile.
Liquid Credits
Liquid Credits are funds who mainly invest in loans. Banks sell these loans to scale down their balance sheets or to fulfill higher capital requirements. These loans typically are of a relatively short duration. Investments in credit funds usually can be liquidated on a monthly or quarterly basis. Based on the strategy, credit funds invest in Senior Secured Loans, Subordinated Loans, Mezzanine, or a mixture of loans, enabling investors to invest in a broad range of risk-return profiles.
ETF’s
ETF stands for Exchange Traded Funds and describes Funds that are listed on a stock exchange. ETF’s often reproduce an index with their investments, thus generating a return profile close to the index. As the ETF is listed on a stock exchange investments can be liquidated on a daily basis.
UCITS’s
UCIT stands for “Undertaking for Collective Investments in Transferable Securities“ and describes a European-wide directive. Funds under the directive can be marketed across the EU if they are domiciled in any EU member state. The Directive sets high hurdles on liquidity causing most alternative UCIT strategies to invest 90% of their capital into short duration floating rate Bonds, listed on a stock exchange, while the remaining capital is invested via derivatives or certificates to implement the strategy and generate returns.
HEDGE FUNDS
Hedge Funds are investment funds with a variety of investment objects and strategies. Investment objects could be stocks, bonds, currencies and derivatives. In addition, Hedge Funds can go short and use credits to take advantage of the leverage-effect. By doing so, Hedge Funds try to maximize their absolute return rather than focus on a benchmark. With these strategies they try to make profits even when markets drop. Thus, they offer interesting alternatives to diversify a portfolio. Note that one should not mix up Hedge Funds with hedging-strategies of futures trading.
Hedge Funds have a lack of transparency. The proper choice of the manager is quite crucial since Hedge Funds extremely rely on the skills of a manager (alpha) rather than the market environment (beta). According to a survey by Preqin, the performance of Hedge Funds quite often hit the expectations of investors during the past couple of years.
Macro-strategies
Macro-strategies observe macroeconomic developments of, for instance, a region or country and try to make profits by using long and short positions.
CTA
CTA is short for “Commodity Trading Advisors”. This class is about a certified advisor who gives advises for future contracts or options on commodities.
Event-Driven
This strategy tries to react on new developments of companies like mergers or restructuring. These events have potential to distort prices of companies in the short-run, which a manager tries to take advantage of.
Relative Value
With this strategy a manager tries to achieve arbitrage-profits. They can occur if for instance two similar assets have different prices at different stock exchanges.
Loan-strategies
Loan Strategies arbitrage between Senior and Junior credit segments of the same issuers. Also, different instruments and durations are hedged one against the other
Equity-strategies
Equity strategies is often referred to as long/short equity strategies. Mangers build long and short positions of equities to arbitrage relative value differences between companies within the same industry
