In this article, David Katz, the president and COO of Larch Lane Advisors, shares three key lessons for financial advisors and investors on managing a liquid alternatives fund. His expertise stems from Larch Lane Advisors forming a joint venture with Rothschild Asset Management in 2014 to manage the Rothschild Larch Lane Alternatives fund. Lessons from their inaugural year include:
- Performance and liquidity can co-exist: The fund's managers studied how hedge fund strategies perform individually and in combination. The time-tested strategies were combined in a way that provides diversification and meets the desired risk-return profile without giving up anything. As opportunities arose, the subadvisors were able to adjust exposures dynamically.
- Most investors have too much equity exposure:The firms utilized what they believe to be the right subadvisor and strategies that, when combined, would be less highly correlated to equities. This included a mixture of currencies, global bonds and commodities. Diversification and disciplined risk management are essential to help mitigate losses.
- There could be a market shakeout coming: While new funds are coming to the market every day, the stream of new managers will slow, leading to a bifurcation between high-quality funds and funds that are not. In this sense, it is good to stay agile and focus on long-term prospects.
Katz concluded that if the first year of the fund has taught
them anything, "it's that digging under the surface is
critical, diversification pays off and the unexamined portfolio is
probably not worth investing in."
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