Spouting Rock Monthly Commentary: Liquid Alternative Assets – September 2016

September marks 15th straight month of Net Inflows for Managed Futures

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

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For September, net asset flows for “Alternative” mutual funds were negative for the sixth month in a row, but YTD net flows remain positive (+$2.1B).   Managed Futures continued to see net inflows in September, along with a smidgen for Multialternative.  Managed Futures have now experienced 15 straight months of positive net flows.  The Liquid Alternatives space as a whole (including Nontraditional Bond Funds) experienced net outflows again in September (-$2.0B) as the Nontraditional Bond category experienced its now 22nd consecutive month of net outflows (-$1.3B for September).  Most other strategies saw marginal net outflows.

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Monthly Focus: Mega Fund Company vs. the Alternative-Focused

We are encouraged to see many (smaller) Alternative-focused Fund Management Companies growing while some mega Fund Companies such as PIMCO, BlackRock and Neuberger Berman have seen assets slip from their Alternative Mutual Funds YTD.  Many Alternative-focused shops seem to have taken a more thoughtful approach than some of the larger shops, focusing more on manager selection for their Alternative investment Funds/strategies rather than simply streamlining Alternative strategies to fill a product lineup.  There are certainly some larger shops who were traditionally long-only but prudent in partnering with several well-established private Alternative (hedge fund) managers as the sub-advisors on their Alternative Funds.

Many of the Alternative-focused Fund shops were forced to start from behind in the mutual fund world, behind in access to large wealth management platforms, behind in marketing reach and budgets as well as behind on assets under management.  As we meet with hundreds of Funds and their managers every year we see many smaller Alternative-focused shops now emerging from their entrepreneur stage of negative cash flow and reaching break-even and many others now turning a profit as their hard work and disciplined investing approaches start to garner more attention and “pay off”.  As allocators of capital to Alternative Mutual Funds we are glad that many smaller shops, sometimes with only 1-2 Funds have stuck it out believing in the need and differentiation of their product as they strengthen the offering in the market.  As performance matures for many of these smaller Funds and shops, we believe that they will be who leads subsequent assets into the Alternative Mutual Funds replacing many of the larger Fund Management Companies initial capture of inflows from earlier years.

Lastly, we at Spouting Rock think it is really important not to think of Alternative Funds as “non-correlated” but rather as “less correlated” to broad equity markets over a defined period.  Just the same way investors view hedge funds return profiles, they should view Alternative Mutual Funds but simply with less leverage.

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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

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