Liquid Alternative Investments

Liquid alternatives (liquid alts) are alternative investment strategies that are available through more traditional structures like a separately managed account or structures like mutual funds, ETFs, closed-end funds, etc. that provide daily liquidity. Liquid alts are also known as “40 Act funds” because they were created by the U.S. Congress in 1940.

The distinction is made about “liquidity” because most alternative investment strategies, alternative investment, and alternative trading strategies are offered in a private investment partnership (hedge fund). Private investment partnerships typically offer monthly liquidity at most so save on the costs of daily administration and calculation of a daily net asset value.

When comparing a mutual fund as a liquid alternative investment structure to a private fund you must consider the costs of administering a mutual fund. For example, the base cost of a operating a mutual fund with daily liquidity and NAV calculation may be $250,000 vs. only $25,000 for a private fund that reports values to investors once a month.

In regard to offering an alternative investment or trading strategy, the portfolio manager just choose the best structure for the strategy. Below is a breif summary of investment program structures. The two main structures are separately managed account and fund.

Separate Managed Account

Liquidity: Daily

Transparency: you see all the trades since you own the account

A separately managed account (SMA) is a term within the investment management industry encompassing several different types of investment accounts. For example, an SMA often is used to refer to an individual managed investment account often offered by a brokerage firm through one of their brokers or financial consultants and managed by independent investment management firms (often called money managers for short) and have varying fee structures. With a  separately managed account (SMA) your money is invested in a separate account titled in your own name rather than pooled in one account with others.

Funds

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. Terminology varies with country but investment funds are often referred to as investment pools, collective investment vehicles, collective investment schemes, managed funds, or simply funds. An investment fund may be held by the public, such as a mutual fund, exchange-traded fund, or closed-end fund, or it may be sold only in a private placement, such as a hedge fund or private equity fund

Mutual Fund

A mutual fund is a type of professionally managed collective investment scheme that pools money from many investors to purchase securities. While there is no legal definition of the term “mutual fund”, it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public.

Liquidity: Daily, though it typically takes 3 days to get your money.

Transparency: you do not see trades and detail since a mutual fund is a pooled account and your investment is a part of the pool.

Hedge Fund

A hedge fund is an investment fund administered by a professional management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are a legal structure and often called a “private investment partnership”.

Liquidity: Monthly. Most private funds only calculate the net asset value monthly to save accounting costs, so the most liquid private funds only distribute cash one day a month.

Transparency: you do not see trades and detail since a mutual fund is a pooled account and your investment is a part of the pool.

As you can see, the most liquid of the liquid alternative investment structures is the separately managed account. Mutual funds may be more liquid than private funds, but they have a significantly higher administration cost.

 

 

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