Managers of liquid alternative products may find it difficult to generate true alpha and investors need to be wary that they are obtaining genuine diversification from these products as they rise in popularity.
This, essentially, was the message from Giordano Lombardo, the chief executive of Pioneer Investments, to fund selectors at the firm’s annual client conference where high interest in the liquid alternatives sector was expressed.
Over three-quarters of the 180 international fund selectors said they need new sources of return and 35% said liquid alternatives are a source of returns that interest them.
Lombardo, who is also Pioneer group chief investment officer, said the firm is investing heavily in the liquid alternatives area.
But he said that creating alpha through liquid alternative investing is not simple and that providers need to learn lessons from hedge funds which, he said, had sometimes provided beta returns and mistaken them for alpha.
“Liquid alternatives is a big initiative we have in terms of deploying resources,” Lombardo told the conference held in Boston last week.
He added: “It is important the liquid alternatives industry learns from the problems that hedge funds had.”
He said investors needed to understand alpha sources, because whereas they perceived alpha, in fact they could find returns had a high correlation with equities, meaning portfolios were less diversified than expected.
Speaking to Funds Europe on the sidelines of the conference, Lombardo said: “Liquid alternatives is still an unproven proposition but I’m convinced that it has legs.
“We need to make sure beta correlation in liquid alternatives is minimised, which is easier said than done. To find alpha strategies uncorrelated from the equity market is a pretty hard thing to do.”
The good news, he said, is not too many negatively correlated liquid alternative strategies are needed to succeed as an investor.
“You can dramatically improve the Sharpe ratio with six or seven strategies. It’s all about execution, not the theory.”
Pioneer offers liquid alternatives in, for example, fixed income. Asked about future development Lombardo highlighted a long-short European equity liquid alternative strategy that now has a one-and-a-half year track record.
The majority of investors at the conference, when polled, said the major gap in their portfolios was to generate sufficient return (36%). Managing drawdown polled second with 22%.
Funds Europe was media partner at the conference.
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