Liquid alts may be the wrong strategy at the wrong time, an award-winning alternative investment advisor has warned.
Arthur Salzer is CEO of Northland Wealth Management, a family office that advocates a flexible “New 60-40” portfolio model where the 40% is made up of alternatives rather than bonds.
Salzer admits that as an outsourced CIO, Northland has a different viewpoint to a typical fund manager who may see liquid alt strategies as a riposte to losing assets to lower-cost ETFs. But he said the new products emerging on to the market offer liquidity when he prefers reduced liquidity and “lock-ups”.
He said: “I can understand why people want to use them but typically the advantage that comes from alternatives is reduced liquidity. It’s not always necessarily for yourself but for people beside you. When you go to a theatre, you don’t want somebody to yell fire, run out of the door first and leave you stuck inside.
“Having lock-ups and reduced liquidity in a fund structure creates better alignment from investors and you’re side by side aligned with general partners of that strategy and fund. We actually like reduced liquidity as opposed to more liquid solutions.”
While liquid solutions might be better than a standalone public solution that can’t go long or short, there are increased fees because of that and Salzer believes that can offset one another to some degree. He has, therefore, shied away from that option.
Comparing alternative fund structure “lock-ups” to your grandmother’s GICs in which liquidity wasn’t a concern, he backed their ability to lend money for longer periods and allow easy access to liquidity premium.
He said: “I think the market’s going to like liquid alts and advisors are going to push it from the IIROC channel but it may be the wrong thing at the wrong time.
“If I was a fund manager and I wanted to increase fees and I was losing investments to lower-cost ETFs, then I would want to bring out a liquid alts strategy but what we do is as an outsourced CIO, so we allocate capital – whether it’s to individual names or funds.
“We really think of ourselves as capital allocators across all the asset classes and in that case fees matter and return potential matters and access matters.
“We are fortunate to be able to go around the Fundserv channel and access managers directly through various structures that you wouldn’t usually find. We like the lock-ups!”
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