Preqin: Liquid Alts Outperformed Hedge Funds in 2014

Apr 24 2015 | 2:19pm ET

A new special report from Preqin shows liquid alternative investment products outperformed single-manager hedge funds last year.

The average alternative mutual fund delivered returns of 4.36% over the course of 2014, compared to 3.78% for single-manager hedge funds, according to Preqin. 

Liquid alternative products, such as U.S. and Canadian mutual funds and European UCITS-compliant funds, follow investment strategies typically pursued by alternative investment managers like hedge funds but through vehicles that are more transparent, have lower barriers to entry and higher trading liquidity. 

Preqin’s report shows that liquid alternative funds have a lower minimum investment than single-manager funds, $190,000 and $1.3mn respectively, as well as lower management fees on average (1.04% compared with 1.55%).

Historically, however, liquid alts have trailed the returns of their hedge fund counterparts due to regulatory limits on such things as instruments and leverage, which hinder their ability to fully replicate a hedge fund's strategy, as well as compliance costs. 

Liquid alts have proven to be very popular. Assets under management by alternative mutual funds and UCITS reached $240 billion and $199 billion, respectively, last year, Preqin’s data shows.

There are now 348 active alternative mutual funds, with 53 launched in 2014, while 64 UCITS launches brought the total for that structure up to 798. 

Preqin found that the greatest allocation to alternative mutual funds is from fund of hedge funds managers, with 62% allocating capital to liquid alternative mutual funds and 48% to UCITS. Fund of hedge funds managers were among the earliest adopters of these products, notes the report. Asset managers, wealth advisors and foundations have also developed significant interest in the space. 

In terms of strategies, Preqin’s survey showed that macro and equity strategies, unsurprisingly, are dominating both the alternative mutual fund and UCITS landscape. 

However, it also notes that nearly a quarter of 2014’s 40-Act alternative fund launches had a credit focus. For UCITS, this figure was 9%

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