What The Recent Vanguard Announcement Means For The Liquid Alternatives Industry

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Expert Analysis and Commentary

What The Recent Vanguard Announcement Means For The Liquid Alternatives Industry

Justin Frankel Mar 26, 2015

Earlier this month Vanguard registered to launch the Vanguard Alternative Strategies Fund, thus instantly bestowing some heavy-weight credibility into the liquid alternatives space. The implication here is that even the most stalwart supporters of passive index investing sees investor demand for strategies that can dampen volatility and provide a source of uncorrelated returns.
When the biggest advocate of low cost indexing makes a move into the liquid alternatives space, it conveys legitimacy to the entire marketplace, but the industry still needs to focus on educating advisors and investors if the growth potential for these types of investments is to be realized.

The Vanguard Filling

Looking at the Vanguard filing, a couple of things immediately struck me as surprising. First, it was interesting to learn that Vanguard has actually been running an account similar to this new fund for over 5 years. It was only late last summer that Vanguard made a splash in the liquid alts space by publishing a whitepaper, entitled “Liquid Alternatives: A Better Mousetrap?”, which basically cautioned investors against rushing headlong into strategies that may not have had long enough track records to prove their worth and carried costs and complexities that might not be appropriate for the average investor.

Also interesting is that the fund is expected to have a total expense ratio of 1.10%. While this expense ratio is toward the lower end of the range for many liquid alternative offerings, it is high relative to Vanguard’s other offerings. Given that the average Vanguard investor is not used to seeing fees and expenses of that magnitude, it will be interesting to see how Vanguard markets this fund and how investors react to this expense ratio.


Vanguard’s Announcement A Positive For The Industry

Vanguard’s entrance into the liquid alternatives space is clearly a positive for the industry, as it endorses the idea that all investors can benefit from access to non-traditional investments and the potential benefits they provide. Given Vanguard’s excellent reputation and track record, their move into liquid alts will likely provide a catalyst for the exponential growth in AUM that has been predicted for the past few years.

Yet, as good as this news is for all of us who advocate for greater use of liquid alternatives, it doesn’t change one of the major concerns that continue to impede wide-scale adoption of these types of investments: the need for support and education to help investors properly evaluate which strategies and offerings are right for them.

The limited track records of most liquid alternative offerings make it difficult to assess how they may perform during prolonged periods of heightened volatility, rising interest rates, and market downturns. It therefore becomes essential that investors and their advisors gain an in-depth knowledge and understanding of the investment philosophies and processes that inform the strategies and guide the portfolio managers.

While a prospectus and fact sheet are necessary and obvious first steps when it comes to investor due diligence, those who consider adding a liquid alternative fund to their portfolio should go beyond the basic marketing materials and try to speak with representatives of the funds being offered. Asking detailed questions about risk management, exposure limitations, organizational depth, and management oversight, to name just a few important factors, are important components to the due diligence process. Good organizations are proud of the infrastructure and internal processes they have built, and their representatives should be accessible and eager to share this level of detail with prospective investors.

Recent surveys suggest that more and more advisors are incorporating liquid alternatives into their portfolios, but while adoption is rising, liquid alts still represent a very small percentage of total assets under management. While it is good news that larger institutions like Vanguard are entering the marketplace with offerings, education and support are essential in order to bring about a meaningful tipping point in terms of AUM.


About RiverPark Structural Alpha Fund

Justin Frankel co-manages the RiverPark Structural Alpha Fund with Jeremy Berman. Prior to joining RiverPark, Justin and Jeremy managed the same strategy as a hedge fund since 2008, and that predecessor fund was converted into a mutual fund in June of 2013.

The RiverPark family of funds consists of seven funds across a variety of equity and fixed income offerings, with a combined $3.6 billion in assets under management. The RiverPark Structural Alpha Fund is a Market Neutral strategy , and is one of three liquid alternative strategies offered by the firm.


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