Andrew Beer, Doug Fincher: Allocating to Liquid Alts Can't be Timed

Liquid alternatives resurfaced top of mind as a bright spot last year when both stocks and bonds struggled.

Now, many advisors are understandably feeling like they missed the opportunity to carve out a portfolio of client portfolios to allocate to liquid alts ETFs. However, according to the industry experts, the funds’ best use case is as a buy and hold investment, making now an ideal time for advisors to begin those conversations with clients.

On Tuesday at Exchange: An ETF Experience, a panel of hedge fund experts discussed how advisors can navigate adding liquid alts to client portfolios and how to have the best conversations.

Doug Fincher, portfolio manager at Ionic Capital Management, said at Exchange some of the products in the inflation hedging space have led to disastrous investor experiences in the past, so enhanced communication between advisors and end clients is crucial.

When considering an allocation to a liquid alts fund, Fincher said, “you have to be able to say [to clients]‘I think inflation is going to rise. In that case, here’s how much money you’re going to make. Or, if I’m wrong, because of the way we structured it, you’re going to lose 2%.’”

Fincher, who manages the Ionic Inflation Protection ETF (CPII), said building a message that gives investors comfort and an overview of the experience and product – both the upside and downside — is key.

“[Managed futures] sounds like it’s the ideal thing to try to time because there’s great years, and then kind of nothing years, and then great years,” Andrew Beer, managing member at Dynamic Beta investments, said during the panel. “And so I say, ‘look, if you can time that, there are much better ways to make money.’”

“We have to recognize that nobody knows how to time this stuff, even though it’s tempting to think that we can,” Beer added.

Beer, who manages the iMGP DBi Managed Futures Strategy ETF (DBMF), said there needs to be a narrative when it comes to liquid alts, explaining the asset class works as a strategic allocation.

“On my end, I’m arguing you should be setting clients expectations,” Beer said. “You’re going to have [managed futures exposure]now. You’re going to have it in 10 years. If you’re still with me, you’re going to have it in 20 years And maybe there’ll be some variation and some slight dialing up or down over a period of time, but it’s got to be strategic.

For more coverage of Exchange 2023, please visit VettaFi | ETF Trends.