Howard Marks Issues Warning on Liquid Alternatives

Mar 27 2015 | 2:59am ET

The co-founder of Oaktree Capital Group, Howard Marks, issued a warning to investors in liquid alternatives.

In a quarterly letter to clients, Marks focused on market liquidity, and discussed whether liquid-alternative vehicles and ETFs are able to perform as well as their underlying assets.

"So-called 'liquid alternatives' or 'liquid alts' are another recent innovation," Marks wrote. "They’re supposed to deliver performance comparable to other alternative investments without the illiquidity they entail. To me it sounds like just one more promise of something for nothing. How many portfolio managers are smart enough, for example, to deliver the alpha of a well-managed hedge fund without accepting the illiquidity that the clever manager of that hedge fund feels he has no choice but to bear?"

Marks suggests that the source of increased liquidity is “usually illusory, fleeting and unreliable, and it works (like a Ponzi scheme) until markets freeze up."

Marks stressed that it is especially dangerous to assume the availability of liquidity in a down market. “We’ll see what happens in the next serious downturn,” he wrote.

Despite the warning, the Wilshire Liquid Alternative Index, which measures broader performance of the liquid alternative investment category, finished up 1.55% and outperformed its investable hedge fund index counterparts in 2014.

The HFRX Global Hedge Fund Index declined -0.58% last year.

Founded in 1995, Oaktree is the world’s largest distressed-debt investor. As of Dec. 31, the firm oversees $90.8 billion. The firm also manages private equity holdings, real estate, and energy-related assets.

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