Vanguard Moves Into Liquid Alternatives With New Fund

Mar 10 2015 | 6:28pm ET

Low-cost index fund behemoth Vanguard is getting into the liquid alternatives business, albeit tentatively.

Vanguard recently registered the Vanguard Alternative Strategies Fund, lending credence to claims that proper portfolio diversification should include alternative investments. 

Critics, however, pointed to Vanguard’s long-held principles, formed decades ago by founder Jack Bogle, that investors should eschew high fees and active management in favor of well-constructed index funds. 

Meanwhile, Vanguard's move into liquid alts is not exactly an aggressive one. For the time being, access to the new fund will be limited to institutional investors, through Vanguard’s Institutional Advisory Services Group, or through the $1.6 billion Vanguard Managed Payout Fund, a fund of funds-like vehicle designed to deliver a 4% return target annually that will devote 10% of its assets to the new fund.  

Industry observers, meanwhile, have noted that Vanguard’s interest in liquid alts actually goes back to its 2007 acquisition of a Charles Schwab market neutral fund, which was subadvised by outside managers until brought in house in 2011. 

The new fund will be actively managed and invest in a range of alternative strategies including long/short equity, currency forwards, commodities, swaps and debt securities. It will carry a 1.1% expense ratio, an amount that Vanguard customers will undoubtedly find high but is well under the 2%+ usually charged by liquid alternatives managers.

As alternatives go, the fund will be the cheapest seat in the house. If past is prologue, the company will steadily reduce fees for the new fund as assets grow. 

Meanwhile, Vanguard has said adding the fund to the Managed Payout Fund will boost fees in that vehicle to 0.42%.

Interestingly, as recently as last summer, Vanguard was urging investors and advisors alike to take a wait-and-see approach to liquid alts, claiming not enough was known about the value of such strategies over the long run. The new fund launch suggests the company’s position has softened, at least for certain types of clients. 

Meanwhile, Vanguard’s market is voting with its feet. According to Morningstar, alternative mutual funds and ETFs were the fastest-growing type of fund last year, with assets gaining 43% annually since 2008.

The fund is expected to launch in the second half of 2015 and will be managed by Vanguard’s Quantitative Equity Group. 


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