Liquid-Alternative Investing from an ETF Strategist Perspective

By Benjamin M. Lavine via

Liquid-Alternative Investing – Harvesting Risk Premiums Outside of Traditional Asset Classes

What is Liquid-Alternative (“Liquid-Alt”) investing? Most Liquid-Alt strategies will target high absolute risk-adjusted returns where the underlying positions, generally invested in publicly-traded assets and derivatives, have low correlations to primary equity and fixed income market risks.  Since many of the strategies seek to neutralize these primary market risks, whether beta for equities or interest rate sensitivity for fixed income, some investors will seek to lever their positions to achieve higher returns, especially in a low yield/interest rate environment like the one we’re experiencing today.

From a risk-factor perspective, Liquid-Alt investing can be viewed as an expansion of the traditional factor-based universe (i.e. Fama/French factors such as size, value, and quality as well as momentum, yield, and low volatility) to include alternative risk factors.  By removing the short constraints and adding the ability to invest outside of traditional equities and fixed income, the Liquid-Alt investor is able to harvest more risk premiums than can be found in traditional asset allocation.

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