What are potential benefits offered by liquid alternatives?
Generally, an alternative investment is one that seeks to provide risk and returns that are different than stocks, bonds and cash. The potential diversification benefits of alternative investments may allow investors to dampen risk in their investment portfolio without necessarily sacrificing returns. Achieving similar returns with lower levels of risk can enable investors to more consistently meet their long term financial goals. Increasingly, investors are looking to liquid alternatives, which are funds seeking to offer the benefits and characteristics of hedge funds with the daily liquidity of a mutual fund, to help build better portfolios.
Why should investors be considering liquid alternatives now?
Elevated stock market valuations and the prospect of rising interest rates may mean lower returns in traditional portfolios. However, alternative investments have historically delivered attractive returns in challenging equity and fixed income environments. As outlined below, during bear markets since 1990 alternatives have outperformed equities by 31% on average.
Furthermore, in rising rate environments over the same period alternatives have outperformed core fixed income by 6% on average. Of course, alternatives come with risks of their own, so it is important to educate yourself before making the decision to invest. 
A conversation with Raanan Agus, Portfolio Manager, GS Global Equity Long Short Portfolio
- You've recently launched a daily liquid equity long short fund, for readers not aware, would you be able to explain why you've chosen to do this now?
In 2014 we were approached by an existing investor in our flagship hedge fund about managing a daily liquid separate account for them and decided that we could create a compelling daily liquid strategy based on the liquid investment ideas in our main hedge fund. Given GSAM's mutual fund expertise and the increasing client demand for daily liquid alternatives, we then decided to also launch a 40 Act compliant mutual fund in the U.S. in September 2014. And, we are now very excited to launch a UCITS portfolio. Looking at the competitive landscape we also believe it is the right time: In 2014 investors poured around $17 billion into UCITS compliant equity long short and equity market neutral funds. We continue to see strong inflows into these two categories this year as well.
- Equities have largely outperformed in recent years - could you give examples of how the strategy has coped in tougher conditions?
One cannot predict future events but it is worth highlighting that our team has a strong history of successfully managing the downside in larger market sell-offs. Historically the strategy has only captured 13% of downturns and our team continues to be focused on capital preservation and on maintaining a low correlation to the main equity markets. Since the portfolio aims to be less exposed to broader equity market moves, investors need to consider that their investment portfolio will not fully participate in both the downwards and upwards markets.
- What is your broad outlook for the rest of 2015 and beyond?
Currently, there may be many opportunities for long-short equity managers in the healthcare industry, which is consolidating through plenty of mergers and acquisitions. Cable sector is benefiting from strong secular growth, which could also present opportunities for equity long/short managers as well as selectively investing in European banks that are undergoing restructurings. Regardless of the overall view of economies, there is more movement within and across sectors, which could be a very favourable environment for equity long/short strategies.
The downside risks for US equity markets have grown as stocks are trading at historically elevated valuations. However, US equity markets have been at higher valuations in the past and the continuation of quantitative easing around the globe could keep extending valuations.
While the ECB's QE programme clearly has a positive, short-term impact on equity markets and recent economic data point to positive momentum for the European economy, I am not convinced that QE will be able to improve the long-term growth potential of the European economy. Investors face the likelihood of lower returns in both bond and equity markets. In such an environment, I believe investors should consider adding equity long/short strategies to their investment portfolio.
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Disclaimer:
Source: HFR Database © HFR, Inc. [Year], www.hedgefundresearch.com.
References to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only and do not imply that the portfolio will achieve similar results. The index composition may not reflect the manner in which a portfolio is constructed. While an adviser seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security.
Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.
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