Cost Of Liquidity Offered By Alternative Mutual Funds And ETFs Is Significantly High Compared To Direct Investing

Thursday, October 18, 2012 06:29
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Cost Of Liquidity Offered By Alternative Mutual Funds And ETFs Is Significantly High Compared To Direct Investing

Tags: alternative investments | ETFs | mutual funds

Alternatives seem to be all the rage among investors seeking higher returns. But only about $130 billion in assets have been invested in mutual funds and exchange-traded funds (ETFs) focused on alternative strategies.

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The so-called liquid alternatives space is viewed as the next frontier of hot investment products by industry participants.
 
But that liquidity carries substantial costs. For example, investing directly in private equity funds requires a multi-year lockup and is anything but liquid. Offering private equity through a mutual fund or ETF cuts the risk premium by about 3%.
 
Private equity ETFs and mutual funds are made up of securities that are modeled after private equity returns. They are not directly invested in private equity funds.
 
The discrepancy also applies to fixed income. An example would be comparing the liquidity premium of newly-issued Treasury bonds to comparable Resolution Trust Corp bonds issued in the late 1980s to bail out savings and loans during that crisis.
 
Although both securities carry a government guarantee, the newer issues carry a liquidity premium of over 5%.
 
A 30% differential comes from comparing the two-year lockup to that of common stock, which is considered a liquid asset.
 
Mark Goldberg, managing director at W.P. Carey Inc. will present these findings the week of October 22 at the Investment News Alternative Investments Conference.

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