Spouting Rock Monthly Commentary: Liquid Alternative Assets – June 2016

Managed Futures Funds Continue to Garner Asset Flows

All asset figures stated and depicted are as of June 30, 2016

Jun1

For June, net asset flows for “Alternative” mutual funds (again, now including Long/Short Credit) were negative for the third month in a row, albeit only -$904M.   Managed Futures continued to see net inflows in June, along with Option Writing (constituent of “Other” category); more on Option Writing later.  The Liquid Alternatives space as a whole (including Nontraditional Bond Funds) experienced net outflows again in June (-$2.6B) as the Nontraditional Bond category experienced its now 19th consecutive month of net outflows (-$1.5B for June).  Most other strategies saw marginal net outflows.

Jun2

Monthly Focus: Option Writing Strategy

Despite the volatility and ongoing uncertainty relating to the Brexit vote in late June, the equity markets turned in a positive return for the month in the U.S.  Throughout the last year, the Option Writing category as a whole has performed well as bouts of volatility have been short and security selection has driven some Funds to outpace the U.S. markets.  We opine that finding a skilled and experienced Option Writing Fund is a nice way to add diversification, income and absolute return to your portfolio.  Option Writing tends to perform well relative to markets when the market moves sideways; giving them the ability to collect premiums on OOM call options they write (sell) and still capturing smaller upward price moves in their selected stocks.  If you believe, like many others, that we will be in a sideways moving market for the next 12-24 months, then you might consider this category for the time being.  The Category average has returned a little over +2.6% YTD.

We wrote a few months ago about Morningstar moving Option Writing out of its Long/Short Equity category and giving it its own standalone category.  We chose to place Option Writing on its own, into our “Other” bucket, as it is not a major Alternative category in our view.  Many Option Writing Funds have performed well in the last year and YTD, which has increased its AUM from $11B to now $12B.  We noticed a nice bump for Option Writing when dissecting the net asset flows for June; finding that the bump was mostly the result of one Fund, Glenmede Secured Options garnering $549M in June, essentially doubling its AUM.  It should be noted that this Fund employs a put writing strategy in addition to a covered call strategy depending on the manager’s risk assessment.   Aside from Glenmede Secured Options, the category has seen marginal net inflows throughout the year and during the last 12 months.

Jun3

As always, we continue to monitor the universe for new fund launches (and closures) as well as observe the flow of assets and any other quirks the Liquid Alternative OE mutual fund world might throw at us.  As the Liquid Alternatives universe continues to mature, it is likely that assets will continue to flow towards “Alternative” funds of the single manager variety.

Spouting Rock

Apr4

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