Three common pitfalls to avoid
With daily liquid alternatives (DLAs) being an alternative to traditional asset classes, naturally there may be less familiarity in how to appropriately allocate to them. Therefore, when we occasionally hear of investor disappointment with alternatives, we at GSAM often find that it stems from poor implementation choices within portfolios, rather than inherent flaws with the strategies themselves. Using the Coronacrisis equity market drawdown during early 2020 as a case study, we uncovered 3 common implementation pitfalls that we believe you should consider avoiding.
1. Casting too wide with the term ‘alternative’
We believe the problem starts with confusion around what exactly is a daily liquid alternative. In our view, DLAs provide characteristics similar to hedge funds in an attempt to differentiate returns from equities and fixed income, reduce portfolio risk, and manage the impact of equity drawdowns. While Morningstar is commonly viewed as the industry guidepost for fund classification, over half of the funds belonging to the alternatives categories do not meet the narrower criteria of our ‘GSAM DLA Peer Groups.’ During the Coronacrisis drawdown, the Morningstar funds that we exclude from our definition exhibited sharp performance disparity—with nearly a quarter having deeper drawdowns than the S&P 500 (-34%). We can help sift through the complex fund landscape to identify funds that we believe are more likely to provide investors with the risk and return characteristics of hedge-fund-like strategies.
