A Horse Race of Liquid Alternatives

Portfolio Protection via Liquid Alts?

June 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Investors can access alternative strategies via mutual funds and ETFs
  • Most of these show moderate to high correlations to equities, which is concerning
  • Bonds would have been a better diversifier in recent years


Investing is challenging as it is complex and complicated, which requires continuous learning and updating of mental frameworks. Conflicts and contradictions are found everywhere. For example, data from the mutual fund industry shows that most funds fail to outperform their benchmarks, but investors in hedge funds allocate primarily for alpha generation as shown by the latest JP Morgan industry survey. If mutual funds do not generate any alpha, why should hedge funds? (read Hedge Fund Factor Exposure & Alternatives)

Perhaps the assumption is that hedge funds have more flexibility with regards to investing, which provides greater opportunity to generate alpha. However, they also charge high fees that directly reduce alpha. Fortunately for investors, many classical hedge fund strategies have become available in low-cost mutual fund and ETF formats, which might represent the best of both worlds.

In this short research note, we will compare liquid alternatives and evaluate the benefits of adding these to an equity portfolio.


We define the universe of liquid alternatives quite broadly and include classic hedge fund strategies such as long-short equity as well as option-based strategies. The key criterion is that they are available via mutual funds or ETFs and therefore accessible for all investors. We create equal-weighted indices for the different categories and have data for all strategies from 2011 onwards (read Liquid Alternatives: Alternative Enough?).

We observe that nearly all liquid alternatives generated positive risk-adjusted returns since 2011, except for market neutral and managed futures ETFs. It is somewhat unusual to see that market neutral ETFs generated negative while market neutral mutual funds generated