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What Are Liquid Alternatives?

Investing techniques that are available through alternative investment instruments are known as liquid alternatives. Read on to know more on liquid alternatives.

Investing in liquid alternatives

Source: Freepik

Liquid Alternative Funds are a type of mutual fund. A mutual fund is a concoction of various asset classes, such as stocks, shares, securities, commodities, and other funds. It focuses on a balanced investment portfolio. We can make an investment decision to invest primarily in government bonds, large-company stocks, or stocks from specific countries. Few mutual funds invest in a combination of stocks and bonds, and other mutual funds. 

A mutual fund enables you to invest in a wide range of assets classes at a low cost. Another benefit is that a competent manager makes investment decisions. The type of mutual fund that we’re going to dive deep into in this article is Liquid Alternative Funds. 

Liquid Alternatives 

Liquid alternative instruments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that seek to diversify and protect investors by exposing them to alternative investment strategies. The key selling point of these items is that they are liquid, so you can purchase and sell them regularly, as opposed to conventional options that only provide liquidity on a monthly/quarterly basis.

More about Liquid Alternatives 

Alternative investments are a broad concept that, in theory, refers to almost any asset that isn’t a long-only stock or bond. Investors do not need to meet net worth or income criteria to invest in them, and they have lower minimum commitments than a traditional hedge fund. 

Drawbacks of Liquid Alternatives 

Since the start of the financial crisis in 2007, the number of liquid alternative funds has exploded as individual investors and advisors have become increasingly interested in hedge fund-like strategies to defend against downside risk. 

Liquid alternative funds, according to critics, charge higher fees on average than most actively managed mutual funds.  

Liquid alternatives
Source: Pexels

Liquid Alternative Strategies and Sub-Categories Examples 

1. Long-short equity

Long-short equity is an investment strategy in which long positions are taken in stocks that are expected to rise in value and short positions are taken in stocks that are expected to fall in value.

2. Market neutral 

A market-neutral strategy is an investment strategy used by an investor or investment manager to benefit from both rising and falling prices in one or more markets while trying to eliminate those types of market risk. 

Performance fees 

Unlike traditional mutual funds, which can only charge performance fees based on the performance of a reference benchmark or index, alternative funds can charge performance fees based on the fund’s total return. Fees for performance must be subject to a high-water mark. 

Source: Pexels

In Canada, the liquid alternatives trend is still in its initial stages. For the investment management industry in Canada, this is an extraordinary period of growth and opportunity. Alternatives are expected to become a more popular approach as we enter a downturn and investors recognize the asset class’s importance.


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