Risk management. Many alternative strategies are designed to perform their best in down periods for the stock and/or bond markets.

Unique exposures. Liquid alternatives can provide access to sources of return that are unavailable to standard equity and bond investors.

Liquidity. Private structures, such as hedge funds and commodity trading advisors (CTAs), typically don’t allow for daily, and especially not intra-day, liquidity. ETFs and mutual funds that engage in these strategies will almost always be able to offer a high level of liquidity.

Cost. Because of the systematic nature of these strategies and the product wrapper (ETF/mutual fund), they are typically much cheaper than private alternatives. ETFs provide an even lower cost, which has shown some benefits so far.

Hopefully this was helpful in better understanding liquid alternatives. As stocks and bonds become more expensive from a valuation perspective, we believe alternatives will play an increasingly important role in investor portfolios.

Grant Engelbart, CFA, CAIA, is a Portfolio Manager at CLS Investments, a participant in the ETF Strategist Channel.