Liquid Alternatives

Liquid alternative investment strategies may be viewed in two subsets—a hedged/opportunistic style and an absolute return approach:

HEDGED/OPPORTUNISTIC

Managers may specialize in sectors, geography, capitalization, etc. and will be active in managing the fund’s ‘net’ exposure to take advantage of evolving market opportunities. The style tends to incorporate either a qualitative or quantitative approach to capital allocation, and may employ a more ‘macro’ perspective to portfolio construction and management. This approach will tend to have greater volatility than absolute return strategies, and may have at times more inherent directional exposure, but should offer reduced volatility and potentially greater downside protection than traditional long-only strategies. There is a greater dependency on the portfolio manager’s ability to effectively set market (or net) exposure appropriate to a given investment environment.

ABSOLUTE RETURN

Managers utilize investment and risk management skills to generate positive absolute returns, i.e. seek a rate of return objective (usually with a goal of 400–800bp in excess of the risk-free rate) regardless of the underlying direction of markets. The performance of these strategies is generally independent of the underlying trend of the asset markets they are exposed to. Some of these strategies are ‘transaction-specific’, rather than market related—returns are driven by manager skill, and tend to be largely uncorrelated with the general market direction.