As a long-standing supporter of the endowment model, I’ve spent decades balancing my enthusiasm for active management and alternative investments against my theory- and evidence-based belief in indexing. But my advocacy of alternatives has been targeted to institutions and ultra-high-net-worth investors. The recent embrace of so-called liquid alternatives by ordinary Americans seeking to fund their retirement is deeply troubling.
What Are Liquid Alternatives?
A traditional investment is a publicly traded stock, bond, or money market instrument, or fund thereof, in any country in the world. Everything else is alternative.
Alternatives, being an “all other” category, are very diverse. They run the gamut from the mundane (rental real estate) to the exotic (fine art, royalties, life settlements). Cryptocurrencies are alternatives, although calling them investments is stretching a point.
The alternative investments that have recently appealed to individual investors—and that have been pushed by some advisors—are liquid alternatives. These are otherwise illiquid strategies, such as private equity, hedge funds, and real estate, that have been repackaged as mutual funds or exchange-traded funds so that they are tradable daily on an exchange. Because of this repackaging, individuals can buy, hold, and sell them with modest amounts of money.
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